Gold's struggle near the $4,000 per ounce mark is testing investor confidence in the precious metal.
While many institutions have turned cautious as a result, leading asset manager State Street remains optimistic, insisting that gold can recover its losses and surge to $5,500 by early next year.
However, persistently elevated inflation, rising bond yields, and an increasingly hawkish Federal Reserve are casting a shadow over this bullish outlook.
Gold briefly loses $4,000 threshold, State Street stays committed to $5,500 target
In its latest Monthly Gold Monitor, State Street Investment Management maintained its forecast that gold will trade within a range of $4,750 to $5,500 per ounce by the end of the first quarter of 2027.
However, with higher interest rates and a stronger dollar continuing to weigh on this non-yielding asset, the firm downgraded the probability of this scenario from 70% to 60%.
The gold research team led by Aakash Doshi, State Street's head of gold strategy, noted that while structural demand continues to underpin the broader gold market, uncertainty surrounding the Fed's monetary policy outlook is steadily mounting.
The latest report also reflects a more cautious stance than late September, when Doshi said that rising bond yields could push gold toward $4,000 but would not break the broader bull market.
At that time, Doshi viewed $4,000 as a potential floor for gold and maintained that prices could reach $5,000 by June 2027.
While that longer-term optimistic view remains intact, State Street's latest report suggests the path to higher prices is becoming increasingly treacherous.
The firm now assigns a 35% probability to a bearish scenario in which gold lingers between $4,000 and $4,750 over the next six to nine months.
Rate hike expectations intensify, rising yields raise the cost of holding gold
State Street noted in its report that spot gold fell 6.57% in September, driven by a 25 basis point Fed rate hike and investors beginning to price in additional tightening.
Money market pricing for the Fed's rate path has undergone a dramatic repricing: as of the end of August, the market expected only 1.5 quarter-point hikes by June 2027; after the September policy decision, expectations shifted to an additional 3.3 hikes over the following nine months.
According to the FedWatch tool, the market expects the Fed to hold rates steady later this week, but the probability of a December hike exceeds 80%, with further increases in the first quarter of 2027 also being priced in.
The shift in rate expectations and the resulting rise in Treasury yields pushed the dollar to a two-month high, raising the opportunity cost of holding gold.
Institutional inflows defy the trend, gold's resilience persists
Despite these headwinds, State Street said the precious metal has shown surprising resilience, with investment demand in particular remaining relatively healthy.
The report showed that despite falling prices, US-listed gold-backed exchange-traded funds attracted $11.7 billion in net inflows during the third quarter, including $3.7 billion in September alone, more than offsetting the $5.6 billion outflow in the second quarter.
Analysts said: "In our view, this indicates that strategic investors continue to allocate to gold as a currency hedge, an alternative fiat asset, and a portfolio diversification tool."
Fed may misjudge AI dividend, stagflation risk looms
The report also highlighted growing concerns that the Fed may once again make a policy error by overestimating the economic dividend from artificial intelligence.
State Street warned that the central bank may be assuming that AI-driven productivity gains will allow the US economy to withstand restrictive monetary policy for a longer period.
If these productivity gains fail to materialize in time, higher borrowing costs will create significant problems for consumers, businesses, and the federal government.
State Street noted that the Fed expects core inflation to return to its 2% target only by 2029, which could leave policymakers with few options: once economic growth begins to deteriorate, they would have little room to ease policy.
This scenario could foster a stagflationary environment, where inflation remains persistently high while economic activity continues to weaken.
State Street believes such an environment would ultimately reinforce gold's appeal as a store of value and a hedge against monetary policy uncertainty.
Technical perspective: $4,000 emerges as key dividing line
Meanwhile, State Street's technical analysis further underscores the importance of the $4,000 threshold.
The report showed that gold closed September below its 50-day moving average of about $4,322 and its 200-day moving average of about $4,539, both of which represent potential resistance in any sustained rebound.
The firm also identified initial technical support at around $4,121, followed by the psychologically significant $4,000 level.
A sustained break below these levels would heighten the risk of a deeper pullback; conversely, reclaiming $4,231 would provide an initial signal that selling pressure is beginning to ease.
Conclusion
With inflation, interest rates, and a strong dollar forming a triple squeeze on one side, and institutional capital and structural demand building a solid line of defense on the other, gold stands at the $4,000 bull-bear dividing line.
State Street's optimism is far from blind, but whether this charge toward $5,500 can withstand the headwinds from a Fed policy shift remains to be seen.
Spot gold daily chart Source: Yihui Tong. As of 12:28 Beijing time on October 28, spot gold was quoted at $4,042.44 per ounce.
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