Fed's Hawkish Voices Continue, The US Dollar Breaks Through 101, Gold Prices Hit Hard Again!

On Wednesday, the gold market experienced a true storm. Spot gold prices fell more than 1.7%, hitting their lowest level since September 17. This is the result of multiple negative factors working together, with the Fed's increasingly aggressive monetary policy signaling at its core. 

The strengthening US dollar has put pressure on gold. The Fed's statements after the FOMC meeting were quite hawkish, with the market expecting at least one more rate hike before the end of this year. Last week, the Fed completed its first rate hike since 2023, raising the rate range to 3.75%-4.00%. However, what truly chilled the market was the intensive hawkish signals released by Fed officials following the rate hikes. The Chicago Fed President made it clear that the Fed may need to view the current energy shock as the root cause of persistent inflation, rather than expecting it to fade on its own.

The market reacted quickly and dramatically. According to CME Group's FedWatch tool, the market expects the probability of the Fed raising rates by at least 25 basis points in October to about 70%, a sharp increase from 53% before the announcement. Investors expect a rate hike in December to reach as high as 95%. 

On Wednesday, the US dollar index rose, reaching its highest level since July 29. S&P Global released the preliminary US September Composite PMI Output Index, which rose from 56.0 in August to 58.4, the highest since July 2021. Driven by a surge in new orders, strong economic data further supported the dollar. A stronger dollar weighed on gold.

Geopolitical factors continue to play an important role in the decline in gold prices. On Tuesday, U.S. President Trump warned at the United Nations General Assembly that he could completely destroy Iran. Iranian President Pezeshiziyan immediately responded from the same podium, asserting that Tehran would never yield to U.S. pressure. The confrontation between the two sides quickly cooled the market's previously optimistic expectations for peace talks. Since the U.S.-Israel war with Iran began in late February, gold prices and oil prices have almost moved in opposite directions. Rising energy prices have sparked concerns about inflation and the Federal Reserve's tightening of monetary policy, while rising expectations of rate hikes have in turn weighed on gold prices.

In the short term, the pressure on gold should not be underestimated. The hawkish stance of Federal Reserve officials is difficult to reverse in the short term, rate hike expectations continue to strengthen, and the dollar's strength pattern shows no signs of softening. However, the global fiscal deficit continues to rise, the trend of dollar credit weakening intensifies, and central banks worldwide have strong strategic gold purchasing demands, all of which provide solid bottom support for gold. 

Market Insight:

For investors, it is important to closely monitor the direction of the Fed's subsequent economic data, especially whether inflation will substantially decline and whether long-term U.S. Treasury yields can fall from near 5%. Against the backdrop of Fed rate hikes driving gold prices down, this may actually create an excellent opportunity to allocate gold.