Why Is the Gold Price Expected to Decline This Week as the Federal Reserve Meeting Approaches?

In the ever-changing global financial market, every move made by the Federal Reserve is like a boulder thrown into a lake, creating ripples. This week, the Federal Reserve is about to hold a meeting, and the eyes of the financial market are focused on it. Many analysts predict that the gold price may decline this week. Behind this expectation lies complex and profound economic logic and market mechanisms.

Looking back at the historical trend of the gold market, we can find that its price fluctuations are closely related to various factors. Over the past few decades, the gold price has experienced several significant cycles. For example, in the 1970s, due to the global economic turmoil triggered by the oil crisis and the collapse of the Bretton Woods system, the dollar was decoupled from gold, and the gold price ushered in a bull market with a sharp rise, soaring from around $35 per ounce to over $800. During this period, inflation was high and the global economy was unstable. Investors regarded gold as an important asset for preservation and appreciation, driving the continuous rise of the gold price.

In the 1980s and 1990s, as the global economy gradually stabilized, central banks around the world adopted relatively stable monetary policies, and inflation was effectively controlled. The gold price entered a relatively sluggish period. Especially in the late 1990s, the rapid development of information technology promoted the prosperity of the global economy, and the stock market performed strongly. Investors' funds flowed massively into risk assets such as stocks, while the gold market was neglected, and the gold price continued to decline, once dropping to a low of around $250 per ounce.

In the early 21st century, with the changes in the global economic pattern and the occurrence of a series of geopolitical events, such as the "9/11" incident, the safe-haven property of gold was highlighted again, and the price began to recover gradually. Subsequently, the global financial crisis broke out in 2008, and the financial market was greatly turbulent. Investors flocked to buy gold for hedging, causing the gold price to rise sharply again, breaking through the historical high of $1,900 per ounce.

From these historical data and trends, it can be seen that the gold price tends to show strong resistance to decline or even an upward trend during periods of global economic instability, rising inflation, and geopolitical tensions, while it may face downward pressure during periods of stable economic growth and moderately loose monetary policies.

Currently, as the Federal Reserve is about to hold a meeting, the market generally expects that it may adopt a hawkish stance. This means that the Federal Reserve may imply or directly take measures such as interest rate hikes or at least release relatively tight monetary policy signals. Once the expectation of an interest rate hike strengthens, it will directly affect the bond yield. Generally speaking, an interest rate hike will drive the bond yield to rise, and the rise in bond yield poses great pressure on gold, which is a non-yielding asset. Investors tend to transfer their funds from the gold market to the bond market to pursue higher fixed income returns, resulting in an outflow of funds from the gold market and a decline in the gold price.

From the perspective of the dollar exchange rate, the monetary policy direction of the Federal Reserve is also closely linked to it. If the Federal Reserve takes hawkish actions, measures such as interest rate hikes or balance sheet reductions usually lead to the appreciation of the dollar. As the world's leading reserve currency and trading currency, the increase in the value of the dollar makes gold denominated in dollars more expensive for holders of other currencies. This suppresses the demand for gold in the international market, especially from emerging market countries. Investors in emerging market countries face a significant increase in the cost of purchasing gold when the dollar appreciates, thus reducing the import and investment demand for gold. This decline in demand further promotes the downward trend of the gold price, forming a mutually influential negative cycle.

Furthermore, market sentiment also plays an important role in the trend of the gold price. On the eve of the Federal Reserve meeting, the uncertainty in the market often reaches a peak. Investors usually adopt a cautious attitude, reducing their holdings of risky assets and instead holding cash or assets with high liquidity. Although gold is regarded as a safe-haven asset to some extent, its safe-haven property will be weakened when the market has a relatively clear expectation of the Federal Reserve's policy and tends to be hawkish. Investors are worried that the tightening policies of the Federal Reserve may trigger turmoil in the global financial market, especially the impact on emerging markets, leading to a series of chain reactions such as a decline in the stock market and fluctuations in bond yields. To cope with this potential risk, they will prefer to hold US dollar cash rather than gold because the dollar has stronger liquidity and universality in the global financial system. This change in market sentiment leads to a decline in the trading activity of the gold market, a weakening of the buying power, and a relatively increased selling pressure, pushing the gold price lower.

In addition, from the perspective of technical analysis, the recent trend of the gold price also shows some signs of weakness. In the past period, the gold price has experienced a certain degree of adjustment and has been hovering near key technical resistance levels. Some technical indicators, such as the Relative Strength Index (RSI), also indicate that the gold market is either in an overbought state or is about to enter a downward channel. Technical analysts usually predict the short-term trend of the gold price based on these indicators, and the current technical situation undoubtedly increases the possibility of a decline in the gold price. When market participants generally refer to these technical analysis results, a market consensus will be formed, further strengthening the expectation and trend of a decline in the gold price.

However, we cannot ignore some factors that may support the gold price. For example, geopolitical tensions still exist in some parts of the world. Geopolitical conflicts in the Middle East, uncertainties on the Korean Peninsula, etc., may trigger market safe-haven sentiment in an instant, driving the gold price to rebound. However, under the influence of the key event of the Federal Reserve meeting, the influence of these geopolitical factors may be temporarily masked. Unless the geopolitical tensions escalate sharply, it is difficult to change the overall expectation of a decline in the gold price this week.

The Federal Reserve's meeting this week has become a key factor affecting the trend of the gold price. The market's expectation of the Federal Reserve's possible hawkish monetary policy affects the gold market through multiple channels such as interest rates, exchange rates, market sentiment, and technical analysis, leading to an expected decline in the gold price this week. However, the unpredictability of the financial market is its inherent characteristic. Any unexpected release of economic data, geopolitical emergencies, or unexpected changes in the Federal Reserve's policy may break this expectation and trigger violent fluctuations in the gold price. Therefore, when investors pay attention to the trend of the gold price, they should not only consider the direct impact of the Federal Reserve meeting but also closely monitor various potential risk factors and market changes to make more sensible investment decisions.