The truth behind the decline in gold prices: Federal Reserve policy shift triggers a chain reaction

The sharp correction in spot gold on Thursday was not simply a technical retracement but a direct reflection of a fundamental shift in market expectations regarding the Federal Reserve’s monetary policy. The gold price fell by $23.90 to $4,171.36 per ounce, exposing a dramatic reversal in market sentiment over the past few trading days.

Policy Expectation Reversal Becomes a Killer Move

The most impactful change was the sudden collapse of the December rate cut probability by the Fed. Traders’ expectations latest dropped below 50%, down from 62.9% the previous day, a decline of over 12 percentage points. This sharp adjustment in expectations directly undermined the fundamental logic supporting gold’s rally.

A series of recent remarks by Federal Reserve officials have thoroughly changed the market’s outlook on future policy. St. Louis Fed President James Bullard explicitly stated that current interest rates are closer to neutral, with limited room for further easing, implying that continued rate cuts could over-stimulate the economy. Cleveland Fed President Loretta Mester also indicated that monetary policy needs to stay at a level capable of controlling inflation, showing reservations about recent rate cuts.

In contrast, earlier market hopes that a government shutdown and resulting economic data gaps would force the Fed to adopt a preemptive rate cut have now dissipated.

Multiple Factors Combine to Pressure Gold Prices

Besides the policy expectation reversal, gold is also facing selling pressure from multiple directions. Independent metals trader Tai Wong pointed out that this correction involves the entire risk asset class, with equities, bonds, the dollar, and cryptocurrencies all experiencing concentrated selling — a typical “buy the rumor, sell the news” scenario. After the government shutdown ended, investors quickly took profits and exited.

Earlier, gold prices touched a intraday high of $4,244.94 per ounce, the highest since October 21, providing an ideal exit point for profit-taking.

The Linkage Effect Between US Stocks and Gold

US stocks experienced a fierce sell-off on Thursday, further reinforcing the downward momentum of gold prices. The Dow Jones Industrial Average plunged 797.6 points (1.65%), the S&P 500 fell 1.66%, and the Nasdaq dropped 2.29%, with all three indices posting their worst single-day performance since October 10.

This stock-bond double decline reflects increasing concerns over whether artificial intelligence capital expenditure can translate into actual productivity gains, with high-valuation assets facing re-pricing pressures. In this environment, gold’s appeal as a safe-haven asset is suppressed by the short-term risk release.

Uncertainty in the Recovery Process

After 43 days of government shutdown, the US government finally resumed operations. However, Juan Perez, head of trading at Monex USA in Washington, pointed out that the resumption itself is not enough to eliminate market uncertainty. When and how the missing economic data for September and October will be completed, the quality of these data, and their impact on market judgment, remain unknown. This information vacuum will continue to elevate market volatility.

Technical Weakness Signals in Gold Are Obvious

FXStreet analyst Christian Borjon Valencia believes that although the upward trend framework for gold remains intact, buying pressure is weakening. The Relative Strength Index (RSI) shows a sideways movement, indicating that the bullish momentum seems to be losing steam.

From a technical perspective, gold closed below the key support of $4,200 per ounce on Thursday, clearing the obstacle for bears. The next important support level is at $4,100 per ounce. If broken, gold will further test the 20-day simple moving average (SMA) support at $4,074. Once this line is breached, the low of October 28 near $3,886 per ounce will become the new downside target.

Fundamental Change in Rate Cut Logic

Kitco Metals senior analyst Jim Wyckoff reviewed the evolution of market expectations. Initially, the rebound in gold was based on the expectation that data released after the government shutdown would show a weakening labor market, thereby supporting a December rate cut by the Fed. However, as more officials expressed caution, this logical chain was broken.

After the Fed’s scheduled rate cut in October, Chair Powell emphasized that further cuts this year are “not a done deal.” San Francisco Fed President Mary Daly recently stated that, given the risks balancing the goals of price stability and full employment, she remains open-minded about the December rate decision — this “openness” effectively provides room to maintain rates.

Rate cuts are generally favorable for gold because gold itself does not generate income and is viewed as a safe-haven during economic uncertainty. But the opposite logic also holds: under tightening policy expectations, gold’s attractiveness diminishes.

Key Points for Follow-up Observation

Before the gradual completion of US economic data, market volatility is expected to remain high. The decline in gold prices reflects both a fundamental shift in policy expectations and the current market sentiment instability. Investors should pay attention to: subsequent remarks from Fed officials, the pace and content of economic data releases, and the volatility direction of global risk assets.