Gold is consolidating above critical support levels amid Federal Reserve policy contradictions and the reversal of the traditional relationship
Gold is struggling to maintain its gains and stabilize above a key support area, despite receiving supposed support from a sharp decline in US bond yields, a slight weakness in the dollar, and renewed doubts about the Federal Reserve’s commitment to returning inflation to its target level, according to an analysis issued by the “StoneX” financial services company.
Federalist: Rhetorical extremism and lack of action
The Federal Reserve kept interest rates unchanged by a vote of 10 to two, in a move that did not surprise markets that were pricing in a “tight” decision that paves the way for a possible hike in December. However, the statements of Federal Reserve Chairman Kevin Warsh raised widespread questions. He acknowledged the rise in inflation, strong economic growth, and the expansion of investment, but he repeatedly relied on improved inflation expectations as evidence of the success of monetary policy.
The analysis considered that this approach reflects “excessive confidence” at a time when inflation has been exceeding the target for more than five years, likening the situation to “the return of the old Fed with new leadership” that is satisfied with promises without actual steps. He pointed out that the financial conditions index is still in the accommodative range at a level of negative 0.690, in addition to that the decision to reduce the number of monetary policy meetings starting in 2027 will increase the time gap between interest decisions.
It should be noted that the markets were anticipating a new rate hike following the September meeting, before prominent officials, such as New York branch president John Williams and member Christopher Waller, sought to calm these expectations and indicated that there was no rush for successive increases. Markets have reacted to these doubts with a sharp decline in two-year bond yields and a weak dollar, suggesting a decline in the Fed’s credibility in the face of inflation.
Inverted market relationships
Despite the rise recorded by gold during Wednesday’s session, it was lukewarm compared to similar data. This is due to the reversal of the traditional correlation of the yellow metal. Instead of moving inversely with the dollar and bond yields, gold went in the same direction, recording during the last five sessions a positive correlation of 0.85 with ten-year bond yields, and 0.59 with the dollar index.
The analysis attributed this phenomenon to end-of-month flows and reports of gold being liquidated to cover losses in other assets such as short-selling positions in Treasury bonds and technology stocks, in addition to the possibility of a scarcity of dollar liquidity.
The $4,000 level is the most prominent line of defense
Gold’s recent rebound stopped at $4,066.57 (low recorded on October 7), while the $4,000 per ounce area remains the most prominent defense line to watch. The analysis described the technical data as “clearly negative,” as gold is moving on a downward path below its medium- and long-term moving averages, with the relative strength index remaining below the 50 level.
To regain upward momentum, the precious metal needs to break above and hold above the $4,066.57 level and break the ongoing downtrend since the early September highs, which could pave the way towards $4,235.30. On the other hand, breaking the support area extending between $4000 and $3942.55 may open the door to a decline towards levels of 3895, then 3791, all the way to $3700.
The analysis concluded by emphasizing that the basic prospects for gold in the medium and long term remain promising given the current monetary policy directions, although the technical picture calls for immediate caution in the short term.
