After gold prices hit resistance at 4,700 and pulled back, the metal has endured six difficult weeks. In July the Fed paused its rate hikes, and then the U.S. Treasury announced bond buybacks 鈥?two positive developments that had briefly powered a gold rally. But since then the market environment has turned sharply worse: Treasury yields have surged, and expectations for the FOMC have grown increasingly hawkish. Still, looking at the broader macro backdrop, the situation has not completely deteriorated. The earlier correction in gold this year merely cooled down a rally that had surged for two straight years and had become severely overbought. The 4,000 level was already a key position last year: in October, that point served as support for five consecutive weeks. The Fed then began its rate-cutting cycle, and gold launched another major advance, breaking through 5,000 and coming within striking distance of 5,600 per ounce. At the time the market was in a state of near frenzy, and given the macro environment, the fundamental logic behind that rally held up. The Fed kicked off a second round of rate cuts, and even with inflation still above the 2% target, the appeal of dollar reserve assets fell further. Rate cuts combined with stubbornly high inflation mean the purchasing power of fiat currencies is being diluted; but fiat currencies can only be measured against one another, so this erosion of purchasing power does not show up directly in the euro, yen, or pound exchange rates. Gold, however, has a limited total supply, and as fiat currencies continue to be diluted, the value gap between the two becomes very clearly reflected in the gold price. Take one example: 2,000 was once a strong resistance that gold failed to break for three and a half years. It was not until the Fed turned dovish in early 2024 that gold broke through, and it kept climbing over the following two years. But this year the rhythm has changed, with one hard-to-control variable being higher oil prices. Oil is not just for transportation; it has a broad impact on the entire economy, which also explains the gold rebound in March, after which inflation picked up again and gold kept falling. Even so, the 4,000 threshold had always been unbreakable, with buyers stepping in to support prices whenever gold approached that level. But when Kevin Warsh made his first appearance at the Fed, his remarks were far more hawkish than the market expected (the market had assumed this Trump-chosen successor as FOMC chair would lean dovish); hit by that shock, gold finally began a retest of 4,000. This decline lasted seven weeks, continuing until after the July FOMC meeting ended. Yet one thing is clear: whenever spot gold falls below this major psychological threshold, funds step in to buy based on value logic.
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