The Federal Reserve’s latest policy statement sent shockwaves through financial markets, with precious metals emerging as one of the biggest beneficiaries. The central bank signaled that interest rate cuts may be delayed further than previously expected, yet gold paradoxically rallied on the news.
Why Gold Rose Despite Hawkish Fed
Traditionally, higher interest rates are considered bearish for gold because the metal pays no yield and becomes relatively less attractive compared to bonds and savings accounts. However, the current environment has broken this historical relationship.
Market participants interpreted the Fed’s hawkish stance as an indication that inflation may be more persistent than previously thought. This inflation concern, combined with growing fiscal deficit worries, has reinforced gold’s appeal as a store of value.
Real Interest Rates Matter Most
The key driver for gold prices is not nominal interest rates but real (inflation-adjusted) interest rates. Despite the Fed’s tightening cycle, real rates remain relatively low when measured against actual consumer price inflation rather than the Fed’s preferred PCE metric.
As long as real rates remain negative or near zero, gold tends to perform well because the opportunity cost of holding a non-yielding asset like gold is minimal.
Looking Ahead
The Fed’s dot plot suggests two rate cuts later this year, which would be bullish for gold. However, the timing and magnitude of cuts remain uncertain, and any surprises — in either direction — could create volatility in precious metals markets.
Investors should be prepared for increased short-term volatility around Fed meetings and economic data releases, while maintaining focus on the longer-term structural factors supporting precious metals.