【TMGM Financial Recap】Why Has Gold Dropped Back Below $4,000 as Inflation Surges, the Dollar Strengthens and Rate Hike Expectations Remain Firm?

Gold remained under heavy selling pressure on Wednesday, with spot prices shedding another 1.1% to finish below $4,000 after Tuesday’s plunge of nearly 3%. An 18-month high in the US Dollar Index followed stronger-than-expected US October CPI figures and hawkish commentary from the Federal Reserve. Markets assigned a 100% probability to a December rate hike, while expectations of a larger, 50-basis-point increase gained ground, weighing significantly on gold. Higher oil prices compounded inflation worries and strengthened expectations of additional Fed tightening.

For gold bulls, an even greater concern was the hawkish tone adopted by Fed officials on either side of the data release. Before the figures were published, Fed Governor Christopher Waller explicitly said that a 0.3% reading for October core inflation would prompt him to consider a half-percentage-point rate hike at the December meeting. Serious concerns over elevated inflation were also voiced by Dallas Fed President Lorie Logan, who signalled support for a substantial rate increase. A Fed hike of at least 25 basis points in December now carries a 100% market-implied probability, compared with around 70% a month earlier. Over the same period surrounding the CPI release, the probability of a larger, 50-basis-point move rose from zero before the announcement to 12.9%.

Rate increases in December and March now form part of Goldman Sachs’ expectations, alongside three possible hikes in 2027. Deutsche Bank, by contrast, projects consecutive increases in December, January and March. The principal source of pressure on gold remains the opportunity cost of holding an asset that pays no interest: that cost rises as interest rates move higher.

The influence of geopolitical developments on gold’s latest moves has been more complex. Concerns about oil supplies resurfaced on Wednesday after Iran’s security chief said that no enriched nuclear material would be allowed to leave the country, helping oil prices rebound from a two-month low. At the same time, US Vice President JD Vance is emerging as the principal negotiator in talks with Iran. He is considering meeting senior Iranian security officials face to face in an effort to end the war. With fighting and negotiations proceeding in parallel, the stalemate makes a complete disappearance of the geopolitical risk premium unlikely. Nevertheless, expectations of Fed rate hikes continue to dominate sentiment, leaving safe-haven demand for gold clearly overshadowed by pressure from rising interest rates.

Support for the market has not disappeared, even as near-term headwinds accumulate. Substantial gold buying continues in China, the world’s largest gold consumer, and among central banks elsewhere, establishing a firm base of support for prices. Short-term price swings often have less influence on central bank purchases. Given their strategic allocation objectives, official-sector buyers are likely to maintain purchases even when prices pull back.

Market Insight: Can Gold Form a Base?

How much further Fed tightening is already reflected in prices remains the central issue for gold. Expectations are largely priced in: a 25-basis-point December hike is regarded as almost certain, and the probability of a 50-basis-point increase continues to rise. Much of the near-term downward pressure may therefore already be incorporated into prices. Once a rate hike is widely anticipated, its eventual delivery tends to produce a smaller market response. What remains uncertain is the duration of the tightening cycle. While the immediate pressure on gold is unlikely to ease readily, central bank buying offers structural support, and a persistent geopolitical risk premium could reduce the likelihood of a deeper fall. A period of fluctuations as gold establishes a base is more likely, with a reassessment awaiting the rate hike itself.