There is tremendous volatility in the markets ahead of Wednesday’s Fed rate decision. It is not only equities markets that are susceptible to declines in the event of a rate hike, it is commodities too. Dollar-denominated commodities such as gold bullion are especially vulnerable to a Fed rate hike. In the days leading up to Wednesday’s decision, gold has plunged as expected. There is a negative correlation between the demand for gold and the strength of the US dollar. When the dollar appreciates, as a result of a rate hike, the demand for gold diminishes. The price of gold bullion has been range bound between $1070 per ounce and $1080 per ounce in the lead up to Wednesday’s decision and the Fed statement.

Gold is typically seen as a safe-haven asset which investors flock to during times of geopolitical uncertainty. However, we should be cautious not to mistakenly attribute weakness in equities markets as a result of anxiety over the Fed rate hike as a reason for gold to rally. If interest rates are to rise by 25 basis points as expected, this will boost the demand for the dollar on the currencies markets, leading to an appreciation of the USD and a depreciation of the traded currencies. Incidentally, the currencies that will likely depreciate relative to the USD include the currencies of developed countries and developing countries alike. The recent strength that we have seen being exhibited by the euro is tapering off somewhat as today’s FOMC meeting gets underway.

Could Gold Prices Move in the Opposite Direction?

But there is absolutely no certainty according to some analysts that the price of gold will not move in the opposite direction. In fact, many attribute this potential outcome to the likelihood that market sentiment has already been factored into the current gold price. When we analyze this carefully, it becomes all too clear that the overall trend for gold is negative and a negative decision such as a rate hike is likely to reinforce this negative movement in the price of gold and continue to propel gold lower.