Why is Gold Still 'Stuck' Despite Soaring Rate Hike Expectations and US Treasury Yields Breaking 5%?

Original Title: "Probability of Fed Rate Hike This Week at 92%, 10-Year US Treasury Yield Breaks 5%, Why Hasn't Gold Crashed?"
Source: Wall Street Insights

Expectations of rate hikes have pushed up risk-free interest rates, strengthened the dollar, and increased oil prices, all of which exert short-term pressure on gold prices. However, the safe-haven demand driven by geopolitical risks and long-term structural buying has formed an effective hedge, allowing gold prices to maintain resilience at critical levels. OCBC has raised its gold price forecast, expecting gold to reach $4,600 per ounce by December 2026. Despite soaring rate hike expectations and US Treasury yields breaking the psychological barrier of 5%, gold has not been crushed—this reflects the tug-of-war between inflation hedging demand driven by geopolitical risks and rate pressures, highlighting the deep contradictions in the current macro environment.

The rapidly deteriorating situation in the Middle East has become the core driver of this market trend. According to Xinhua News Agency, the Houthi rebels in Yemen launched a new round of attacks on Saudi Arabia, prompting Saudi Arabia to close its east-west oil pipelines, which transport about 4% of the world's oil supply daily. Oil prices subsequently surged to around $107 per barrel, with Brent crude reported at $106.96 per barrel. The energy shock has intensified market concerns about persistent inflation, with the CME FedWatch tool indicating that the probability of a 25 basis point rate hike by the Fed this week has risen to about 92% to 93%. The 10-year US Treasury yield briefly touched 5% on Monday, marking the first time since October 2023.

However, gold has not collapsed under this negative combination. Spot gold has fluctuated narrowly around $4,300, down more than 3% from its high of over $4,600 per ounce at the end of August, but still firmly holding the $4,000 support line. The expectations of rate hikes, rising risk-free interest rates, a stronger dollar, and increasing oil prices all constitute short-term pressure, but the safe-haven demand driven by geopolitical risks and long-term structural buying has formed an effective hedge, allowing gold prices to maintain resilience at critical levels.

Supply Shock Combined with Rate Hike Expectations: Gold Under Pressure but Not Crushed

Gold fell more than 1% to a five-week low on Monday before stabilizing slightly on Tuesday. Spot gold was reported at $4,298.86 per ounce.

From a logical chain perspective, rising oil prices → warming inflation expectations → increased certainty of Fed rate hikes → rising US Treasury yields → stronger dollar, each link constitutes a bearish factor for gold. Gold does not generate interest, and during a rising interest rate cycle, its attractiveness relative to interest-bearing assets naturally declines.

However, this logic has encountered strong countermeasures in the current context of the Middle East conflict. After the Saudi east-west pipeline was attacked, Saudi Arabia has not clarified when the pipeline will resume operations, nor has it specified whether it can increase shipments through the Strait of Hormuz to fill the gap. The continued uncertainty regarding supply prospects has kept the market highly alert to inflation risks and geopolitical turmoil, supporting gold's safe-haven attributes.

US Treasury Yields Break 5%: A Signal of Rate Hikes or Resonance of Fiscal Concerns?

The 10-year US Treasury yield breaking 5% is not due to a single factor, but rather the result of multiple forces resonating together.

Inflation pressure is the direct trigger. In August, the US CPI rose 3.4% year-on-year, with core CPI up 2.4% year-on-year but accelerating to 0.3% month-on-month. Non-farm payrolls added 162,000 jobs, and the unemployment rate remained at 4.1%. This combination of 'inflation not extinguished, employment resilience' has left the market with little doubt about the Fed raising rates at the September FOMC meeting. According to a Reuters survey, economists surveyed expect at least one more rate hike within the year.

At the same time, fiscal factors are also continuously pushing up long-end yields. Public data shows that in the first 11 months of this fiscal year, US net interest payments have historically exceeded $1 trillion for the first time, and the total federal debt has surpassed $40 trillion. Additionally, the issuance of corporate bonds related to AI infrastructure construction has surged; according to Goldman Sachs data, Alphabet, Amazon, and other large-scale cloud service providers have issued about $194 billion in bonds this year, with the total issuance expected to reach around $250 billion.

PGIM Credit's co-CIO Greg Peters candidly stated, "I keep asking myself, what could be a catalyst to lower yields? Besides traditional economic recession, it is really hard to find other factors. The conditions for keeping yields high or even continuing to rise are completely in place." CreditSights' investment-grade and macro strategy head Zach Griffiths indicated that the 10-year US Treasury yield could further surge towards 5.5%.

What is the Market Betting On: One Rate Hike or 'Higher for Longer'?

What truly moves the market's nerves in this FOMC meeting is not the rate hike itself, but the signals regarding the policy path conveyed by the dot plot and the press conference.

According to Morgan Stanley's forecast, the Fed is expected to raise rates by 25 basis points in both September and December, citing the secondary effects of energy prices, strong demand driven by AI investments, potentially temporarily high neutral rates, and considerations for maintaining the credibility of monetary policy.

Regarding US Treasury yields, Steven Barrow, G10 strategy head at South Africa's Standard Bank, has raised his year-end forecast for the 10-year US Treasury yield to 5.2%, expecting it to further rise to 5.3% in the first quarter of 2027. "One factor that convinces me that yields will break 5% is that even without significantly exceeding expectations in inflation data, yields have already risen close to 5%," Barrow stated. He also expects the Fed to maintain stable rates until the end of 2027 after raising rates once in September and December.

The team led by TD Securities strategist Gennadiy Goldberg believes that given the market has significantly priced in rate hike expectations, yields will not rise sharply due to the rate hike itself, but unless there are signs of economic deterioration, long-term bond yields should generally remain at high levels by 2027.

OCBC forex analyst Christopher Wong pointed out that high oil prices, high US Treasury yields, and weakened safe-haven sentiment have collectively boosted the dollar, but as rate hikes have been fully priced in, further dollar appreciation requires the Fed to clearly retain the option to continue tightening.

Long-term Support Remains, Institutions Raise Gold Price Targets

Despite the short-term pressures being non-negligible, institutional investors' long-term outlook for gold has not reversed.

OCBC has raised its precious metals price forecast, citing higher price starting points, improved investment participation, and sustained structural demand support. Chez Anbu, head of OCBC's wealth advisory department, stated that gold's strong rebound in August reversed the previously weak trend, and the macro backdrop is improving. The bank now predicts that gold will reach $4,600 per ounce by December 2026, with a target price for silver set at $69.70 per ounce.

From a price structure perspective, the support level of about $4,000 per ounce established during the previous adjustment period remains intact. Although gold fell more than 3% in September, it is still well above that bottom area.

For gold holders, the core logic of the current situation is: Rate hikes have increased the opportunity cost of holding gold, but the same rate hike drivers—inflation concerns triggered by energy shocks and geopolitical uncertainties—are also supporting gold prices. As long as the situation in the Middle East does not show significant signs of easing, this internal tension will persist, and the safe-haven premium of gold will not easily dissipate.

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