Traders now put the odds of a December Fed rate hike at 73%, and that number, not oil, is driving the gold price today. Gold briefly rose as oil prices fell on Tuesday, then slid back under $4,000 by the close.
Here’s why that hike chance matters. Gold pays no interest, so higher Fed rates make it less appealing to own. Bonds and savings accounts start to look better by comparison.
Spot gold edged up to $3,953.37 an ounce by 9:07 a.m. ET, according to Reuters wire text carried by Business Recorder. The metal then faded, and Kitco showed it at $3,929.40 by late afternoon, down $16.30 on the day.
Why cheaper oil lifted gold prices, for a few hours
Oil fell about 2% after President Trump said on Fox & Friends that the U.S. is stopping military aid to Israel. “We’ve already agreed that by the end of this year we won’t be paying Israel,” he said.
So why does a barrel of crude move a shiny metal? Cheaper oil eases inflation worries, which lowers the odds of more Fed rate hikes. Gold pays no interest, so higher rates make it less attractive (it’s the roommate who never chips in for rent). Phillip Streible of Blue Line Futures told Reuters the oil drop helped lift precious metals.
The real story: the Fed is thinking about hikes
The Fed held rates at 3.75% to 4.00% on Oct. 28, but in a 10-2 vote. Both dissenters wanted an immediate hike, as we covered in our look at the split Fed vote ahead of the midterms. CME FedWatch now shows that 73% chance of a December hike, down from 76% earlier Tuesday.
That leaves gold stuck. Oil dips help for a few hours. But Treasury yields rose to 4.93% and the dollar firmed, a combination that tends to weigh on the metal. Gold now sits about 29% below its January peak.
What the gold rate means for your wallet
Here’s the thing: if you own gold coins, jewelry or a gold ETF, the swings you’re seeing are mostly about interest rates, not safety. Because the gold rate follows the Fed, a December hike would also make car loans, credit cards and mortgages more expensive. Cheaper oil is the best shot at talking the Fed out of it.
What to watch next
Three things could move the price of gold from here. For more on the economic backdrop, see Jamie Dimon’s warning about hidden risks in a booming economy.
- Friday’s October jobs report: a hot number would lock in a December hike, and a soft one would cut the odds.
- Midterm results and Iran: an ING note warned it is “probably too early to think escalation risks have passed.” Oil had jumped earlier Tuesday after the U.S. struck Iran’s Qeshm Island.
- The $3,875 line: a close below the Oct. 30 low would confirm more weakness, per Rio Times.
Gold got a gift from oil on Tuesday morning and handed it right back. Whether it keeps anything depends on a jobs report and a war, and gold gets a vote on neither.
