Gold faces a critical test as markets reprice Fed rate expectations

Domestically, the dollar was whipsawed by a shifting Fed outlook through the week, leaving gold caught between a structurally softer greenback and rising rate-hike probability.

Disclaimer: This article is written by Kaynat Chainwala, AVP commodity research at Kotak Securities. Views expressed are his own. Readers' discretion is advised.

 

Gold entered the second week of September in an uncomfortable position. After its strongest monthly performance since January, climbing over 10 per cent in August to close near $4,450 per ounce and briefly approaching $4,700 for the first time since mid-May, the metal has spent the first week of September giving back ground. The August rally had a clear architecture. An expanded US Treasury long-bond buyback programme eased pressure on long-end yields, a pullback in crude reduced inflation fears, and strong inflows into gold-backed ETFs reflected genuine institutional conviction. September has complicated each of those pillars simultaneously.

 

 

The mechanics of the reversal are straightforward. Fed Governor Christopher Waller struck a cautious tone, indicating he would support holding rates steady provided disinflation trends continued, and that commentary briefly pushed gold above $4,500 as rate-hike expectations retreated. The move unwound sharply after US August payrolls arrived at 162,000 against a consensus near 56,000, a substantial upside surprise compounded by a meaningful upward revision to July's initially weak print. The dollar and yields moved higher, gold surrendered its gains, and the first week of September closed mildly lower around $4,430.

 

The dollar's subsequent softening to near two-month lows around 98.6 has provided some cushion. The yen firmed meaningfully after several Bank of Japan officials adopted a more hawkish tone ahead of the central bank's September 18 policy decision, strengthening conviction that a rate increase is likely, which weighed on the dollar independently of the Fed narrative. 

 

Domestically, the dollar was whipsawed by a shifting Fed outlook through the week, leaving gold caught between a structurally softer greenback on one hand and rising rate-hike probability on the other.

 

A more useful way to frame gold right now is through the 10-year TIPS yield, currently at 2.4 per cent. TIPS, or Treasury Inflation-Protected Securities, are US government bonds whose returns are adjusted for inflation, making their yield a measure of real, inflation-adjusted borrowing costs. August's rally largely reflected markets pricing out the probability of further Fed tightening, which brought real yield pressure down and made gold more attractive. The strong payrolls report has partially reversed that. The Fed's September 16 meeting is now genuinely live, with markets assigning roughly 60 per cent probability to a 25 basis point hike, a meaningful shift from the hold-majority pricing that prevailed through much of August.

 

This week's inflation prints carry the weight of a policy decision. A hot CPI, particularly in core readings that strip out energy, would likely cement the case for a September hike and push gold toward the $4,280 to $4,300 support zone, with a break below risking a move toward $4,200. A benign reading, consistent with the disinflation trend of recent months, would reduce hike probability and reopen the path toward $4,500. 

 

Oil complicates the picture. Renewed Houthi attacks on Saudi infrastructure have pushed crude to multi-week highs, and elevated oil can push headline CPI higher even if domestic inflation remains contained.

 

Beneath the near-term noise, the structural demand picture that anchored August's rally remains intact. The People's Bank of China extended its gold-buying streak to 22 consecutive months in August, adding 20 tonnes to bring official holdings to 2,387 tonnes. World Gold Council data show central banks purchased 289 tonnes in the second quarter of 2026, up 62 per cent year-over-year, providing a physical demand base that is far less sensitive to weekly shifts in Fed expectations. Global gold-backed ETFs recorded $17.1 billion in inflows in August, lifting year-to-date inflows to $27.7 billion and marking a clear acceleration in institutional allocation. These flows provide an important structural cushion, but they are unlikely to prevent sharp tactical corrections if real yields and the dollar rise together.

 

Gold's setup into the September 16 FOMC decision reflects more than a simple hike-or-hold binary. A resilient labour market, oil-driven inflation from the Hormuz standoff, and softening consumer sentiment point to a stagflationary mix, an environment in which gold has tended to perform well. Tactical pressure from rate-hike expectations is real, but the structural case for gold in a world of fragmented geopolitics, supply-side inflation, and sustained central bank buying remains intact. A hike on September 16 would likely extend the pullback in gold and the metal could test $4,300 to $4,200 support zone. A hold, especially if Fed Chair Warsh signals comfort staying on pause, would likely trigger a sharp recovery. Friday's CPI print sets the stage for that decision, and until then gold is likely to trade cautiously while keeping its structural floor.

 

On the daily chart of MCX Gold Futures, the broader structure remains range-bound within a contracting symmetrical triangle, with price sustaining above the rising lower trendline. The recent rebound from the ₹148,201 support zone has improved price structure, but the contract remains below the falling trendline and ₹157,075 resistance. Momentum has weakened, with RSI at 49.95, below its signal average at 57.44, indicating neutral-to-cautious momentum and scope for further consolidation. Immediate resistance is placed at ₹157,075, followed by ₹160,898, while key supports stand at ₹148,201 and ₹144,811, with the broader ₹140,000 zone as the major base. The near-term bias remains neutral to mildly positive above ₹148,201; a decisive breakout above ₹157,075 would strengthen the bullish setup towards ₹160,898, while a break below ₹148,201 could revive downside pressure.