The global monetary regime is changing again, and is behaving as though the change carries remarkably little cost. The raised rates by 25 basis points on September 16, taking the federal funds target range to 3.75% to 4.00%. It was the first Fed hike in more than three years, and the decision was accompanied by a clearly restrictive policy message. Sixteen of eighteen Fed policymakers projected at least one additional increase before the end of 2026.
The Fed is hardly operating in isolation. The European Central Bank recently raised its policy rate to 2.50%, Australia has already tightened three times this year, New Zealand has delivered consecutive hikes, and on September 18 the Bank of Japan increased its policy rate to 1.25%, the highest level in 31 years. Markets are also pricing additional tightening across several developed economies. Whatever terminology is used, the broad direction of monetary policy has shifted materially toward a higher cost of money.
That environment should matter considerably for gold because gold generates no yield. Its attraction partly depends on the relative return available from holding cash and high-quality fixed-income securities. When central banks increase policy rates and bond yields rise with them, investors are offered greater compensation for holding interest-bearing assets. If inflation expectations remain contained while nominal yields increase, real yields rise as well, making the opportunity cost of holding gold even larger.
This relationship is more precise than simply saying that higher interest rates are bearish for gold. Gold ultimately competes with real returns rather than the nominal policy rate alone. A central bank can raise rates while inflation expectations rise even faster, leaving real rates unchanged or lower. Gold can also benefit from geopolitical risk, fiscal concerns, currency weakness, central bank purchases and portfolio hedging demand. There has never been a mechanical rule saying that a 25 basis point hike must produce a specific percentage decline in bullion.
The problem is that this qualification can only explain so much of the current price action.
Gold initially behaved normally after the Fed decision. Spot gold fell more than 1% and traded around $4,240 after the rate increase as the dollar strengthened and markets absorbed the prospect of additional tightening. Then, barely a session later, the move was almost completely reversed. On September 17, spot gold surged 2.3% to $4,360.36. On September 18 it added another 0.5%, trading around $4,361 even as another major central bank, the Bank of Japan, joined the tightening cycle.
There are explanations for the rebound. prices retreated, the weakened from its immediate post-Fed move and Treasury yields eased. The had moved close to 5% before slipping back to around 4.94%. Those changes reduce some of the immediate pressure on gold. A weaker dollar supports dollar-denominated commodities, while lower Treasury yields reduce the relative advantage of holding interest-bearing securities. Reuters specifically cited the weaker dollar, lower oil prices and falling Treasury yields as drivers of Thursday’s rebound.
That explanation works well for a relief rally. It becomes less convincing when used to explain the scale of the reversal.
The Fed did not cancel the hike. It did not signal that September was a one-off move. Inflation concerns did not disappear within twenty-four hours. Sixteen of eighteen policymakers still expect another increase this year. Other central banks are moving in the same direction. A small retreat in the 10-year Treasury yield from around 5% therefore changes the daily trading environment without reversing the monetary regime that pushed yields there in the first place.
This distinction matters. Gold traders currently appear to be reacting aggressively to every marginal decline in yields or the dollar while applying a much larger discount to the policy tightening responsible for the higher level of those yields. In effect, the market is responding strongly when financial conditions loosen slightly from extremely restrictive levels, while showing surprisingly little concern about how restrictive those levels have become.
That creates an unusual asymmetry.
Before the Fed meeting, gold bulls could argue that a large amount of tightening had already been priced in and that the central bank might ultimately refuse to deliver it. That argument lost considerable weight on September 16. The Fed actually raised rates. The decision was unanimous. Policymakers indicated further tightening. Short term Treasury yields rose, and the dollar initially strengthened. The hypothetical tightening cycle became an actual tightening cycle.
Gold still recovered almost immediately.
The traditional store of value argument also deserves closer examination under these conditions. Gold preserves purchasing power over very long periods, but that characteristic does not eliminate the opportunity cost of holding it. If investors can receive increasingly attractive real returns from cash or government bonds, the hurdle rate for owning an asset with zero cash flow rises. A store of value still has to compete with another store of value that suddenly pays interest.
This is especially relevant when tightening is becoming global. The BOJ’s September 18 increase to 1.25% marked its second hike in three months and took Japanese rates to their highest level since the mid 1990s. Reuters described the broader environment as one in which central banks in the United States, Europe, Britain, Australia and elsewhere are confronting renewed inflation risks and markets are expecting additional tightening. The significance for gold extends beyond one Fed meeting because the global pool of zero-cost liquidity that historically supported financial assets becomes less abundant as policy rates rise across jurisdictions.
This does not mean gold has to collapse tomorrow. Markets can remain disconnected from traditional relationships for considerable periods, particularly when positioning, short covering and momentum become dominant. Thursday’s 2.3% rally may contain exactly those elements. Once a heavily watched support level holds and short positions begin covering, the resulting buying can trigger systematic strategies, momentum flows and additional covering regardless of whether the underlying macroeconomic argument improved by the same magnitude.
But price action and fundamental justification are two separate questions. Gold at $4,360 can continue moving higher because buyers continue buying it. Explaining why an investor should accept zero yield while policy rates are rising across major economies requires a stronger argument than observing that Treasury yields fell several basis points after reaching exceptionally restrictive levels.
That is now the central issue for gold.
If Treasury yields continue falling materially, the dollar weakens and markets begin removing future Fed hikes from the curve, the rally will acquire a clearer macroeconomic foundation. The opportunity cost of holding bullion would be falling again, and gold’s resilience would make much more sense.
The more revealing scenario would be the opposite. If real yields remain elevated or move higher, the dollar strengthens, additional Fed tightening remains priced and other central banks continue raising rates while gold keeps climbing, the conventional macro framework will have increasingly little explanatory power over the move. At that stage, positioning, momentum, structural demand or speculative flows would have to account for a much larger share of the price action.
The September 16 Fed meeting therefore changed the debate. Before the decision, investors could argue about whether the tightening cycle would actually begin. That question has now been answered. The Fed raised rates, the BOJ followed, Europe has already tightened and markets expect additional increases elsewhere.
Gold has answered by rising for two consecutive sessions.
There is nothing impossible about that. There is, however, something increasingly difficult to reconcile between the direction of global monetary policy and the price investors are willing to pay for an asset that produces no income. If the tightening cycle continues and gold continues treating every minor decline in yields as a reason to rally while ignoring the broader rise in the cost of money, the discussion will gradually move away from whether gold is expensive and toward a more fundamental question about what is actually driving the market.
