Gold prices fell on Wednesday after the US Federal Reserve raised interest rates for the first time in more than three years and signalled another increase could follow later this year.
Spot gold fell 0.7% to around US$4,250 ($6,005) an ounce by 3:00pm ET, reversing an earlier gain of as much as 1.5% in the lead-up to the Fed’s decision.
The Federal Open Market Committee voted unanimously to raise the benchmark federal funds rate by 25 basis points at this week’s policy meeting, marking its first increase since July 2023.
“Today’s policy action will support a timelier return to the committee’s 2% goal,” Fed officials said in a statement, referring to the central bank’s inflation target.
The Fed also pencilled in another rate increase later this year as policymakers continue efforts to bring inflation under control.
Higher rates pressure gold
Higher interest rates are generally a headwind for gold because the precious metal pays no interest, making interest-bearing assets relatively more attractive to investors.
“The market has pretty much priced in the possibility of a Fed rate hike this afternoon,” Bart Melek, global head of commodity strategy at TD Securities, told Reuters ahead of the decision.
Gold had gained ahead of the announcement but reversed course following the Fed’s decision and updated rate outlook.
The precious metal is now down around 1% for the year, having faced pressure from persistent inflation and shifting expectations for US interest rates.
Banks remain bullish on gold
Despite the near-term pressure, some analysts remain constructive on gold’s prospects towards the end of the year.
Goldman Sachs (NYSE:GS) has set a year-end target of US$4,900 per ounce, implying a sharp recovery from current levels.
TD’s Melek also noted that the US Treasury could play a role in bringing bond yields lower, as it did in August, which he believes would ultimately be supportive of gold over the longer term.
Write to Jackson Chen at Mining.com.au
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