Spot gold extended its recent decline on Wednesday, falling 1.17% to settle at $4,543 per ounce. The price touched an intraday low of $4,510.21, marking its lowest level since late March. U.S. gold futures also dropped, settling 1% lower at $4,561.50. This marks multiple consecutive sessions of losses for gold, as market sentiment has swiftly shifted from relative optimism to caution and even pessimism. The Federal Reserve's hawkish stance in its recent policy decision, ongoing Middle East conflicts, a sharp rise in oil prices, and renewed inflation concerns have essentially erased market expectations for interest rate cuts this year, while boosting expectations for potential rate hikes. This has strengthened the U.S. dollar, putting significant downward pressure on gold prices. In early Asian trading on Thursday, spot gold edged slightly higher, trading near $4,555 per ounce, as investors awaited interest rate decisions from the Bank of England and the European Central Bank, along with key economic data and further developments in Middle East geopolitics.
The Federal Reserve's April meeting concluded with a decision to hold interest rates steady, maintaining the federal funds rate target range at 3.5% to 3.75%. While this outcome was widely anticipated, the surprising element was the significant internal dissent revealed by the 8-4 voting split—the most pronounced division within the Fed since 1992. Typically, policy statements achieve near-unanimous approval, but this time, four policymakers dissented. Three of them opposed maintaining the signaling of a potential easing bias, and one advocated for an immediate 25-basis-point rate cut. A subtle but crucial wording change in the policy statement indicated heightened concern, with the Fed noting that "inflation remains elevated, partly reflecting recent increases in global energy prices," compared to previous characterizations of inflation as "somewhat elevated." The statement also explicitly cited Middle East developments as a key source of uncertainty for the economic outlook, acknowledging the impact of regional tensions on monetary policy. Independent metal trader Tai Wong noted that the dissenters' push to remove the easing bias added pressure on gold. As a non-yielding asset, gold is highly sensitive to interest rate expectations; reduced prospects for rate cuts or increased risks of hikes raise the opportunity cost of holding gold, diverting funds toward yield-bearing assets.
Ongoing Middle East conflicts have exacerbated the situation. U.S.-backed military actions against Iran have driven oil prices above $100 per barrel, extending gains for an eighth consecutive session—the longest rally since Russia's invasion of Ukraine in February 2022. The expiring June front-month contract surged 6% to settle at $118.03 per barrel. Rising oil prices intensify inflation concerns, which, counterintuitively, can hurt gold. While gold is traditionally a hedge against inflation, runaway inflation may force central banks to adopt more aggressive rate hikes, pushing up real interest rates and severely pressuring gold prices. U.S. President Trump's recent statements escalated tensions, emphasizing a continued maritime blockade of Iran until it agrees to a nuclear deal. He warned that Iran's oil storage and pipelines are near "bursting point." Iran responded defiantly, threatening "real and unprecedented military action" if the U.S. persists with the blockade of the Strait of Hormuz, a critical global oil chokepoint. Any escalation could drive oil prices higher, potentially pushing the global economy toward stagflation. Further compounding concerns, the U.S. Central Command has requested deployment of "Dark Eagle" hypersonic missiles to the Middle East, targeting deep within Iran. Trump indicated that military action remains an option if Iran does not concede. This tense environment drives避险 flows toward the U.S. dollar and Treasuries rather than gold.
The Fed's decision triggered a strong dollar rally, with the U.S. Dollar Index rising 0.35% to 98.938. Juan Perez, head of trading at Monex USA, highlighted that the dissent signaling potential rate hikes or removal of easing bias supports the dollar. He added that incoming Fed Chair Warsh's alignment with Powell and a generally hawkish committee composition, amid a lack of global central bank consensus, favors dollar strength. U.S. Treasury yields also climbed to one-month highs. The rate-sensitive two-year yield rose 8.4 basis points to 3.928%, while the ten-year yield increased 5.4 basis points to 4.408%. Higher bond yields offer attractive alternatives to gold, drawing away避险 capital. Axel Merk, president and chief investment officer at Merk Investments, explained that rising oil prices push bond yields higher without a corresponding increase in long-term inflation expectations, leading to tighter financial conditions and higher real rates. This supports the dollar and systematically diminishes gold's appeal.
Leadership changes at the Fed add another layer of uncertainty. Outgoing Chair Jerome Powell announced he will remain on the Board of Governors after his term ends, an unprecedented move in modern central banking. Powell stated he does not intend to be a "high-profile dissenter" but hopes to see reduced political attacks on the central bank. His continued presence may constrain incoming Chair Kevin Warsh, who has criticized the Fed and, influenced by Trump, supports rate cuts. Capital Economics analyst Thomas Ryan noted that Powell's retention shifts the FOMC toward a more hawkish composition, complicating Warsh's potential easing efforts. Treasury Secretary Scott Bessent expressed dissatisfaction, calling Powell's decision a breach of Fed convention and an insult to Warsh and other officials, indicating ongoing political tensions that could influence future policy.
Amid the price decline, the World Gold Council's Q1 demand data offered some positive notes. Global gold demand rose 2% year-over-year, driven by strong bar and coin investment and a 3% increase in central bank purchases, reflecting sustained strategic accumulation. However, jewelry demand plummeted 23%, highlighting sensitivity to high prices and a lack of consumer-side support.
In summary, gold faces significant headwinds from a hawkish Fed, Middle East-driven inflation pressures, a strong dollar, and rising bond yields. Powell's continued presence adds policy uncertainty. While central bank buying and retail investment provide underlying support, bearish forces currently dominate. Market analysts suggest that only a diplomatic breakthrough between the U.S. and Iran to calm oil prices could improve gold's near-term outlook. Key factors to watch include potential military escalation in the Strait of Hormuz and whether the Fed removes "easing bias" from future statements. Traders will also monitor upcoming U.S. PCE data, Q1 GDP, and policy decisions from the ECB and BOE.
As of 07:40 Beijing time, spot gold was trading at $4,554.50 per ounce.
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