Gold Prices Surge as Fed Rate Hike Expected
Gold prices surged on Wednesday after reversing most of this week's losses as crude oil dropped and government bond yields eased. The US Federal Reserve's decision to raise interest rates for the first time since July 2023 was widely expected, with a 93% likelihood of raising rates according to Fed Funds futures tracked by the CME's FedWatch tool.
Market consensus forecasts another 25 basis points rise by year-end, but precious metals strategist Nicky Shiels at MKS Pamp notes that gold prices are suggesting the Fed should hike only once within six months. This suggests that either gold is overpriced or the interest-rate market is wrong, according to Shiels.
The inflation rate held near 5-year lows of 2.3% per annum in July on the Trimmed Mean PCE measure favoured by the Fed, but long-term borrowing costs have leapt in the bond market. The Washington's 10-year Treasury bond closed at 5.00% per annum for the first time since July 2007.
Analysts note that a more hawkish interest rate outlook has weighed on investor interest, while healthy buying by central banks during July-August has provided support to gold prices. The battle between short-term pressure from interest rate expectations versus geopolitical drivers for gold continues.