Gold challenges the Fed's hawkish rate outlook

Key Points:

• Gold holds despite hawkish Fed expectations, as investors increasingly focus on the prospect of easing inflation following the recent sharp decline in energy prices. 
• Three Fed rate hikes are now priced in by next June, but a sustained oil price slump could challenge these expectations and provide renewed support for gold. 
• Bearish technical signals keep CTAs on the sell side, with USD 4,000 providing initial support and resistance around USD 4,155 and USD 4,225. 
• Central banks and ETF investors continue accumulating gold, supported by reserve diversification, fiscal concerns and geopolitical uncertainty, underpinning the longer-term investment case.

Gold is rebounding despite a hotter-than-expected US inflation report that prompted markets to fully price in three Federal Reserve rate hikes by next June. The recovery suggests investors may already be questioning the increasingly hawkish outlook, focusing instead on the prospect of inflation rolling over in the coming months should the recent sharp decline in energy prices persist. Such a development could undermine expectations for further tightening, potentially easing pressure on Treasury yields and the dollar.

In terms of setting the agenda, gold faces a continued tug of war between short-term traders responding to a weak technical outlook and longer-term investors who continue to see the metal as an important portfolio diversifier and hedge against economic, fiscal and geopolitical uncertainty. Central bank and ETF demand figures suggest this underlying investment case remains intact, despite near-term headwinds.

Tuesday's nearly 3% slump towards USD 4,000 followed an October CPI report showing headline inflation rising 0.4% and core prices increasing 0.3%, both exceeding forecasts. The release came shortly after Fed Governor Waller backed a 25-basis-point December rate hike without ruling out a larger 50-basis-point move. Treasury yields surged as traders increased their bets on further tightening, with the bond selloff amplified by the liquidation of recently established bullish Treasury positions following the stock market correction. The two-year Treasury yield, particularly sensitive to Fed policy expectations, rebounded sharply from a two-month low of 4.44% reached last week amid the equity market selloff to 4.76% on Tuesday, ahead of the Veterans Day holiday, which has kept the US Treasury cash market closed today.

Short-term technical outlook remains bearish

Despite the rebound, gold's technical outlook remains challenging. Following a major round of short covering after the US midterm elections, commodity trading advisers (CTAs) and other momentum-driven strategies are once again facing bearish signals. Short-, medium- and long-term moving-averages points lower with no crossovers or reversals seen, suggesting systematic traders may continue selling into rallies unless prices break decisively above key resistance levels.

Having failed to sustain a break above USD 4,155, gold retreated towards USD 4,000, which remains the first important support level. A sustained break below this psychological threshold may increase the risk of renewed weakness towards the late-October low below USD 3,900. Resistance is initially seen at the recent highs, at USD 4,150 and USD 4,225. With the 200-day moving average also trading well above current prices, a sustained recovery would require a meaningful improvement in momentum.

Managed money traders such as hedge funds and CTAs have been net sellers for several weeks, culminating in the week to 3 November when silver's net long shrank to just 2.7k contracts, the weakest since February 2024. Gold's net long fell to a five-month low of 104k contracts, while platinum joined palladium in net short territory for the first time since May 2025.

The key challenge is that short-term price direction is increasingly being determined by momentum-driven traders, while some of the strongest underlying demand comes from buyers operating on a much longer time horizon.

Central banks and ETF investors underpin longer-term demand

The latest World Gold Council (WGC) figures highlight the strength of underlying demand. Central banks purchased an estimated 321 tonnes during the third quarter, up 42% year-on-year, bringing purchases during the first nine months to 675 tonnes. China remains a prominent buyer, with the People's Bank of China (PBOC) adding 63 tonnes in Q3 and another 25.8 tonnes in October, extending its buying streak to 24 consecutive months.

Central bank accumulation continues to reflect strategic priorities, including reserve diversification, reduced dollar dependence and protection against geopolitical and sanctions-related risks. The WGC's latest survey found that 89% of central banks expect global official gold reserves to increase over the coming year, while 45% plan to raise their own holdings.

ETF investors have also demonstrated resilience. Physically backed gold ETFs attracted 211 tonnes of inflows during Q3, worth a record USD 31 billion, followed by another 19 tonnes, or USD 2.7 billion, in October despite falling prices. Global holdings consequently reached a record 4,275 tonnes, highlighting continued institutional demand for portfolio diversification and protection against fiscal and financial uncertainty.

However, demand is not universally strong, with global bar and coin purchases falling 19% year-on-year in Q3 and jewellery consumption declining 17%, reflecting the impact of elevated prices on more price-sensitive buyers.

Why the longer-term investment case remains intact

Several structural factors continue to support gold's longer-term outlook. Persistent government deficits and rising sovereign debt burdens have increased concerns about fiscal sustainability, while geopolitical fragmentation and the potential weaponisation of financial assets have encouraged reserve managers to diversify.

For institutional investors, gold provides an asset without issuer or counterparty risk, offering diversification at a time when inflation shocks can undermine the traditional defensive relationship between equities and government bonds.

These developments do not guarantee higher prices, but help explain why strategic investors remain willing to accumulate gold despite deteriorating short-term fundamentals and technical signals.

What could change the near-term outlook?

For now, the biggest challenge remains the Federal Reserve. Persistent inflation and further interest-rate increases could keep Treasury yields and the dollar elevated, while continued CTA selling or weaker ETF flows could amplify downside pressure.

However, the recent oil price slump could challenge this outlook if sustained, potentially reducing inflation pressures and prompting traders to scale back expectations for three rate hikes by next June.

There is an important timing complication: November CPI is not due until 10 December, one day after the Fed's next policy decision. Evidence of easing inflation may therefore arrive too late to prevent a December hike, but could encourage investors to reduce expectations for further tightening in early 2027.

A Middle East peace agreement would also have mixed implications. Lower energy prices could reduce inflation and rate expectations, while easing geopolitical tensions could simultaneously undermine part of gold's safe-haven premium.

Overall, gold remains caught between a bearish short-term technical outlook and, in our opinion, a more constructive longer-term investment case. As long as yields remain elevated and momentum indicators point lower, further selling cannot be ruled out. Nevertheless, continued central bank accumulation, resilient ETF demand and persistent fiscal and geopolitical uncertainty suggest weakness may increasingly attract strategic buyers.

The question is whether these longer-term investors can absorb selling from systematic traders before a change in the interest-rate outlook provides the catalyst for a more sustained recovery.