Gold prices recovered on Wednesday as oil prices eased and investors positioned for the Federal Reserve’s interest-rate decision, with markets already assigning a high probability to another rate increase.
Spot gold rose 0.8% to $4,326.83 an ounce by 0650 GMT, recovering from a more than one-month low reached on Monday. U.S. gold futures for December delivery, however, fell 0.8% to $4,367.20.
Markets were pricing in a 92.7% probability of at least a 25-basis-point rate hike later Wednesday, according to CME FedWatch. A press conference from Fed Chair Kevin Warsh will follow the decision.
The immediate direction of gold is likely to depend less on the widely anticipated rate increase than on the Fed’s assessment of what comes next.
“A hawkish Fed could pull gold down, while any soft messaging may ease bets on hikes and help the metal recover,” said Frank Walbaum, a market analyst at trading platform Naga.com. “Traders are also monitoring oil prices and developments in the Middle East.”
Gold typically benefits from inflation and geopolitical uncertainty because investors use the metal as a store of value when confidence in financial assets or currencies deteriorates. But it does not generate interest or dividends, making higher interest rates a competing attraction. When Treasury yields rise, the opportunity cost of holding bullion increases.
That tension has escalated now because the bond market is already undergoing a significant repricing.
The U.S. 10-year Treasury yield breached the closely watched 5% level on Tuesday, pushing global government bond yields higher and adding pressure to assets that compete with fixed-income securities. The rise in long-term yields has occurred even as investors confront an energy shock that threatens to keep inflation elevated.
Gold’s resilience in that environment has surprised some analysts.
Commerzbank said it was somewhat unexpected that bullion had not come under greater pressure given the rise in yields. The bank pointed to persistent fiscal concerns, reflected in elevated long-term government bond yields, as well as a recent increase in U.S. political risks, as factors that could be supporting gold.
That has resulted in a more complicated backdrop for the precious metal than the conventional relationship between gold and interest rates would suggest.
If the Fed signals that rates will remain elevated for longer, real yields could rise further and weigh on gold. But if investors increasingly question the sustainability of government borrowing, currency stability or the ability of central banks to contain an energy-driven inflation shock, demand for bullion could remain strong even with elevated rates.
Oil is adding to that uncertainty.
Crude prices fell Wednesday following an unexpected increase in U.S. inventories, but the market remained focused on supply risks after Saudi Arabia suspended oil loading at its Yanbu port.
Brent and U.S. crude have remained above $100 a barrel as the war involving Iran continues to disrupt energy flows and raise concerns about the security of critical infrastructure and shipping routes.
Saudi Arabia’s air defenses also destroyed a Houthi drone south of Mecca before it entered prohibited airspace over the holy city, according to a spokesperson for the Saudi-led military coalition in Yemen.
The continuing attacks mean oil remains an important variable for both the Fed and financial markets. A sustained rise in crude prices can feed directly into fuel and transportation costs and eventually influence broader inflation expectations. That could make it harder for the central bank to ease monetary policy even if higher borrowing costs begin weighing on economic activity.
For gold, analysts say the effect is more complicated. This is because higher oil prices can initially hurt bullion by reinforcing expectations for higher interest rates. Still, persistent inflation and geopolitical risk can simultaneously strengthen its appeal as a hedge.
That conflict is playing out across financial markets.
Global government bonds have extended their sell-off as the 10-year Treasury yield moved through 5%, while equities have remained remarkably resilient. The S&P 500 is up more than 10.8% this year, the Nasdaq Composite has gained 11.8%, and the Dow Jones Industrial Average is up 8.4%.
Stocks in South Korea, Japan and Europe have also advanced, despite the combination of an energy crisis, higher bond yields and recurring geopolitical volatility.
The apparent disconnect is especially pronounced in technology stocks.
Recent warnings from leading AI executives that the development of powerful models may be moving too quickly have introduced another source of uncertainty for investors. Yet equity positioning remains broadly bullish.
Bank of America’s latest Global Fund Manager Survey, released Tuesday, found that the “excess bullishness” evident over the summer had moderated, but investors continued to expect strong economic growth and corporate earnings.
The survey of 170 investors managing a combined $470 billion found that a net 49% remained overweight global equities in September. That was slightly lower than the previous month, but equities remained the most widely held overweight asset class.
Investors have also become more optimistic about earnings. Expectations for double-digit earnings-per-share growth over the next 12 months reached their highest level since August 2021, while 38% of respondents expected the global economy to experience a “boom” over the coming year.
At the same time, bond allocations fell to their lowest level since May 2022. That positioning presents a notable tension with what is happening in fixed income and commodities.
Investors are heavily positioned for corporate earnings growth and continued AI spending, even as the risk-free rate is rising, oil remains above $100, and geopolitical uncertainty is feeding into inflation expectations.
If Treasury yields continue to climb, that could eventually force investors to reassess how much they are willing to pay for equities whose valuations depend on future earnings. Higher yields increase the discount rate applied to those earnings, particularly affecting growth-oriented companies with cash flows expected further in the future.
Gold occupies a different position in that debate.
The metal can lose some appeal when real interest rates rise, but its investment case can strengthen when investors become more concerned about fiscal sustainability, geopolitical instability or persistent inflation. The simultaneous rise in bond yields and gold is thus seen as an indication that at least some investors are not treating higher yields as sufficient protection against longer-term macroeconomic risks.
Other precious metals also moved higher. Spot silver gained 1.5% to $64.59 an ounce, platinum rose 0.7% to $1,787.90, and palladium advanced 2.2% to $1,317.50.
The Fed decision will provide the next immediate test for gold. A clearly hawkish message could bolster the dollar and Treasury yields, increasing pressure on bullion. A softer signal could allow gold to extend its recovery.
But the larger market question extends beyond Wednesday’s rate decision.
Investors are simultaneously confronting an energy shock, a Treasury market sell-off, elevated inflation, geopolitical risk and a technology sector whose enormous investment cycle is increasingly being questioned on safety and valuation grounds. Yet positioning data show that many investors continue to expect strong earnings and economic growth.
The situation leaves gold caught between two powerful forces. Higher rates raise the cost of owning a non-yielding asset, while the very inflation, fiscal, and geopolitical pressures driving rates higher are also strengthening the case for holding bullion.
