On Wednesday, July 29th, spot gold experienced a sharp reversal that caught many investors off guard. Ahead of the Federal Reserve's decision to maintain interest rates, gold prices came under pressure, even briefly dipping below the $4000 mark. However, after the Fed confirmed it would keep the federal funds rate target range unchanged at 3.50% to 3.75%, spot gold quickly surged, reaching an intraday high of $4116 per ounce, its highest level since July 23rd. By the close of trading, spot gold had risen 0.94% to settle at $4066.13 per ounce. In early Asian trading on Thursday, July 30th, gold prices extended their gains, briefly touching the $4100 level, up approximately 0.84%.
This move was notable for its apparent contradiction with fundamental market expectations. Fed Chair Walsh delivered a distinctly hawkish tone during the press conference, with three FOMC members even voting for an immediate rate hike. Yet gold did not fall; instead, it led a broader asset rally. Independent precious metals trader Tai Wong precisely captured this paradox: "Despite Chair Walsh's overall hawkish stance, precious metals are leading a modest risk-on rally. This feels like a relief rally after the Fed's decision to hold rates steady. How long it can last remains unclear. Walsh's language was nuanced and quite complex, so the market may change its view after deeper reflection."
The Fed's Hawkish Pause: A Rare 9-3 Internal Split
This FOMC meeting was the second rate decision chaired by Walsh since he succeeded Powell in May. The decision to hold rates steady was passed by a 9-3 vote, but three dissenters—the presidents of the Cleveland, Dallas, and Minneapolis Fed banks—explicitly argued for an immediate 25-basis-point rate hike. These three officials had also voted against the decision at the last meeting under Powell in late April. Such a scale of internal dissent is rare in the Fed's history. Kathy Bostjancic, chief economist at Nationwide, noted, "The number of dissenting votes highlights that policymakers are becoming increasingly hawkish."
Meanwhile, the market had already priced in roughly a one-third probability of a rate hike ahead of the decision, with traders at one point betting on a nearly 30% chance of a move. Walsh chose to stand pat. In his press conference, he stated, "I wanted to see a family argument, and I did. That's the purpose, and it's part of the institutional design." He characterized the internal debate as a necessary part of the system, but also sent a clear message to the market: the Fed is "absolutely unwavering" in its fight against inflation. Walsh emphasized that inflation has been above the Fed's 2% target for over five years, a problem that "cannot be solved in nine weeks, nor by a single month of modest price declines." He made it clear the Fed does not have a higher "soft inflation target" and is determined to bring inflation back down to the 2% long-term goal.
Why Did the Market Rise Instead of Fall? Three Forces Propelling Gold
Faced with such a hawkish signal, gold's ability to rally was driven by three converging forces. The first force was a "relief rally" from the disappointment of rate hike expectations. Heading into the decision, market expectations for a rate hike had rapidly escalated, with some traders even betting on the possibility of a move. When the Fed ultimately chose to hold steady, pent-up buying pressure was released, pushing gold prices up roughly $40 in a short period. The CME FedWatch tool showed that after the decision, the probability of a September rate hike fell from about 81% to 64%.
The second force was a decline in the US dollar and Treasury yields. Following the decision, the dollar weakened against the euro, making dollar-denominated gold cheaper for overseas buyers. The US Dollar Index fell 0.58% on Wednesday, its largest single-day drop since April 30th, closing at 100.81 and hitting a fresh one-week low of 100.76 intraday. Meanwhile, the two-year Treasury yield, after briefly rising to 4.339% during the session, fell sharply by 5 basis points to 4.227%. The decline in short-end yields, which typically move in tandem with Fed rate expectations, provided direct support for gold.
The third and perhaps most critical force was the market's deep anxiety about long-term inflation and long-end rates. While short-end yields fell, the 30-year Treasury yield surged 7.1 basis points to 5.167% after Walsh's press conference, even briefly breaking above 5.2%, its highest level since 2007. Tai Wong commented, "There's a panic in the long end of the bond market, dragging stocks lower into the close. Concerns about inflation are helping gold outperform." This "short-end down, long-end up" steepening of the yield curve sends a contradictory yet profound signal: the market is relieved about short-term rates, but its anxiety over long-term inflation and fiscal prospects is intensifying. It is precisely this kind of concern that has rekindled gold's appeal as a traditional inflation hedge.
Geopolitical Storm: Surging Oil Prices and Safe-Haven Demand
If the Fed's decision was the spark that ignited gold's rally, then the sharp escalation of the Middle East situation provided the fuel to sustain it. On July 29th, the US and Saudi Arabia launched a joint airstrike against Iranian-backed armed groups in Iraq. This marked the first major US military operation in the Middle East since President Trump suspended airstrikes in Iran last week. The airstrikes killed at least 20 members of Iraq's Popular Mobilization Forces and wounded 32 others. Simultaneously, Iran fired on a US military base in Jordan and vessels in the Strait of Hormuz, prompting Trump to vow retaliatory strikes. More worrying, a floating LNG storage vessel owned by a US company was hit by a drone attack at Egypt's Damietta port. This event signals that the Middle East conflict is spreading from major battlefields to a wider area. Sources indicate that Trump is reassessing whether to launch a new, large-scale military operation against Iran, with US Central Command having drafted a plan for a 10-to-14-day intense air campaign.
In response, international oil prices surged about 7%. US crude futures rose 6.56% to close at $84.46 per barrel, while Brent crude futures jumped 7.91% to settle at $90.74 per barrel. The surge in oil prices directly exacerbated market concerns about inflation, as the Middle East conflict is pushing up global fuel and food prices. For gold, the geopolitical risk provides a dual support: on one hand, safe-haven demand directly boosts gold buying; on the other hand, the inflationary pressure from rising oil prices reinforces gold's value as an inflation-resistant asset.
Outlook and Key Levels
In the short term, shifts in September rate hike expectations will be a key variable. Following the decision, the probability of the Fed holding rates steady in September rose sharply from 23.4% to 42.6%, while the probability of at least a 25-basis-point hike fell from 76.6% to 57.4%. The market will now focus on the US June Personal Consumption Expenditures (PCE) data, the Fed's preferred inflation gauge, due for release on Thursday. This data could directly impact the September rate hike outlook.
From a broader perspective, gold is being pulled by two opposing forces. On one hand, the Fed under Walsh has shown a strong determination to fight inflation, and the high-interest-rate environment will continue to pressure the non-yielding gold asset. Some analysts suggest that until the Fed's policy direction becomes clearer, gold prices are likely to trade in a range between $3960 and $4170. On the other hand, geopolitical risks show no signs of abating, with Trump assessing a new large-scale military strike against Iran. The long-term inflation concerns reflected in the 30-year Treasury yield breaking above 5.2% are still fermenting, and global central banks continue to buy gold, providing a long-term structural support. These factors together form the underlying logic for a potential gold bull market.
As of 07:15 Beijing time, spot gold was trading at $4090.66 per ounce.