By: Fiona Cincotta, Senior Market Analyst
Gold has dropped to a five-week low, falling 1.8% over one week and extending that decline by a further 1.4%, and the Federal Reserve dot plot now matters more to the metal than the rate decision itself. Markets have moved from roughly 60% to above 85% odds of a 25-basis point hike after hotter than expected U.S. core PCE inflation, which means the decision carries little surprise value. Here is what happened next, attention shifted to the projections, the press conference and the path the Federal Reserve sketches beyond this meeting. For gold, that path is the variable that sets the opportunity cost of holding an asset that pays no yield.
Fiona Cincotta, StoneX Senior Market Analyst, has spent more than 15 years analyzing UK, European and U.S. markets across foreign exchange, equities, commodities and digital assets. She works across the macroeconomic data and central bank policy channels that move precious metals, combining fundamental and technical analysis in her coverage of gold.
A fully priced hike removes the decision itself as a source of new information for the gold market. The repricing that followed the U.S. core PCE inflation release went well beyond this single meeting, and that extension is what changed the arithmetic for gold. As Cincotta puts it, "not only has the market become more convinced that the Federal Reserve will hike rates this week, but also that they will hike rates again in December". Traders are now reading the new rate projections and the dot plot for the shape of the path rather than the size of one move. Specifically, a longer path of higher rates keeps bond yields elevated for longer, and gold pays the cost of that through the yield it forgoes.
The communication style of the Federal Reserve chair has become a live variable for gold traders. Federal Reserve Chair Kevin Warsh "doesn't particularly like to go towards that forward guidance", which leaves the published projections carrying information the chair would otherwise deliver verbally. Cincotta notes that "the rate projections and the dot plot give us a bit more information" in that setting, making the projection materials the primary release to watch. In contrast to meetings where guidance does the talking, the gold market here has to infer the path from the dots and from the press conference. Whereas a fully priced hike is already in the market, a hawkish shift in the dots is not, and that is where the volatility risk for the metal now sits.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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