Gold prices briefly touched $4,220 on Wednesday after softer-than-expected US inflation data reduced the probability of a Federal Reserve rate hike at the October meeting. The rally proved short-lived, however, and the metal reversed to end the session lower, leaving it on track for substantial September losses near the year-low around $3,940.
Why the rally fizzled
The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, held at 3.4% in August, a softer reading than many had anticipated. This lowered the odds of an October rate hike from above 70% at the start of the week to roughly 40%, triggering an initial bid for gold. Yet the broader data flow was unequivocally strong: US gross domestic product (GDP) for the second quarter was upwardly revised to 2.2% from a previous estimate of 1.5%, while the ADP Employment Change report showed 90,000 new private-sector jobs added in August. A healthy labour market, steady growth and contained inflation together reduce the urgency for aggressive Fed action, but they also support the US dollar and keep Treasury yields elevated. The yield on the 10-year note sits at 5.30%, fresh multi-decade highs, reinforcing the opportunity cost of holding zero-yielding gold. The dollar’s strength has been a persistent headwind, as investors need dollars to buy US government debt, a dynamic that has kept the greenback dominant.
Near-term headwinds remain
In the short run, gold faces a combination of high yields and a robust dollar. While the probability of an October hike has fallen, the market is still pricing in a sizeable chance of further tightening, and the Fed has not signalled an imminent pivot. The Middle East conflict adds an extra layer of uncertainty. Navigation through the Strait of Hormuz has reportedly returned to about 80% of pre-war levels, suggesting that oil supply disruptions are easing. Lower oil prices would reduce inflation fears and could diminish safe-haven demand for the dollar, a scenario that would favour gold. However, any escalation in the region would likely reverse that trend, boosting the dollar again. With the US mid-term elections approaching, President Trump may avoid major foreign policy moves for now, keeping the geopolitical backdrop volatile but not immediately escalating.
Longer-term signals point higher
From a technical perspective, gold’s monthly chart shows the metal printing higher lows above its 20-month simple moving average (SMA), a bullish structure that has held throughout the recent sell-off. This pattern suggests that long-term buyers are stepping in at progressively higher levels. On the macro side, contained inflation reduces the need for the Fed to keep rates elevated for an extended period. As the economy continues to grow, the odds of additional rate hikes should decline further, and yields cannot keep climbing indefinitely. US President Trump has also expressed a preference for lower rates, though no near-term move is expected. If oil prices ease and Middle East tensions subside, the case for a sustained gold recovery strengthens. The bottom line: near-term weakness is likely to persist while the dollar remains strong, but the medium-to-long-term risks are skewed to the upside for the live gold price.
Key takeaways
- Gold briefly rallied above $4,200 after soft PCE data lowered October rate hike odds from above 70% to roughly 40%, but the move reversed as strong GDP, employment and inflation data reinforced the dollar and yields.
- The metal remains near its year-low around $3,940, on track for substantial September losses.
- High Treasury yields (10-year at 5.30%) and a strong dollar continue to pressure gold in the near term.
- Long-term technicals (higher lows above the 20-month SMA) and macro fundamentals (contained inflation, potential for easing Middle East tensions and lower oil) point to eventual recovery.
Common questions
Why did gold rise on the PCE data if it quickly reversed?
The softer PCE reading reduced the market’s expectation of an October Fed rate hike, which typically supports gold by lowering the opportunity cost of holding the metal. However, other data released at the same time showed robust economic growth and a strong labour market, reinforcing the dollar and bond yields, which quickly overwhelmed the initial bullish impulse.
What are the main headwinds for gold in the short term?
The two dominant headwinds are elevated US Treasury yields, which make non-yielding assets less attractive, and a strong US dollar, which is supported by solid economic data and ongoing safe-haven demand related to Middle East tensions.
What could trigger a sustained rally in gold?
A sustained rally would likely require a combination of lower oil prices, a de-escalation of the Middle East conflict, and a clear signal from the Federal Reserve that interest rate increases are on hold. From a technical perspective, maintaining support above the 20-month SMA is a positive sign for long-term buyers.
Conclusion
Gold’s brief spike on the back of soft PCE data highlighted the market’s sensitivity to any sign of a less hawkish Fed, but it was quickly overpowered by the broader environment of a strong dollar and high yields. Near-term pain may continue, but the technical and macro setup suggests the downside is limited and the eventual tilt is toward recovery.