Gold Finally Begins to Budge as Dollar and Rates Rise

Gold has finally begun to react to the recent changes in monetary policy. The precious metal had continued to trade above $4,300 despite several bearish macro variables moving against it, including a Federal Reserve rate hike, higher Treasury yields, and a strengthening dollar.

The decline in gold prices is relatively small so far but its timing matters. Over the past few weeks, inflation data has strengthened, Treasury yields have moved sharply higher, the Fed delivered its first rate increase in more than three years, and expectations for further tightening increased.

Gold's recent resilience may partly reflect the distinction between an expected policy decision and an unexpected change in the rate path. Markets had already assigned a high probability to the September rate move before the decision, which means some of the tightening had already been incorporated into Treasury yields, the dollar, and gold.

The current decline in gold prices may signal that investors are starting to take the opportunity cost argument more seriously. With higher US rates and higher Treasury yields supporting the dollar, gold requires increasingly powerful offsetting demand to maintain its valuation.