The mysterious factors hidden from view make the gold price look towards 3800!
2025-09-16 18:01:26
Gold prices consolidated below $3,700 during the European session on Tuesday (September 16th), with bulls mobilizing their forces to launch a general offensive towards that level. Gold prices are currently trading at $3,697.61, up 0.52%. Market expectations are that the Federal Reserve will cut interest rates by at least 25 basis points this week, lowering the federal funds rate to a range of 4% to 4.25%. As a zero-yielding asset, the yellow metal benefits from the lower opportunity cost of holding the metal as a result of the benchmark interest rate cut.
Gold prices have already priced in and benefited from the expected rate cut, so the rate cut itself is unlikely to cause significant fluctuations; its impact is already factored into current pricing. However, from the perspective of real interest rates, reducing opportunity costs involves raising inflation, in addition to lowering the federal funds rate. Higher inflation would also significantly benefit gold prices. Technically, gold prices could target 3,800.
Loose monetary policy is inherently inflationary. The core rationale behind interest rate cuts is to stimulate lending and consumption, thereby releasing liquidity. Market expectations are that the Federal Reserve will cut interest rates by at least 25 basis points this week, lowering the federal funds rate to a range of 4% to 4.25%.
Gold prices have already priced in and benefited from the expected rate cut, so the rate cut itself is unlikely to cause significant volatility, as its impact is already factored into current pricing. The key driver of post-meeting market reaction will be the policy guidance released by the Federal Open Market Committee (FOMC). If Powell hints at further rate cuts, gold prices are expected to surge further. However, if Powell and his team suddenly shift to a hawkish stance, signaling that future rate cuts are limited, this could put downward pressure on precious metals prices.
But from a long-term perspective, how will this apparent shift to looser monetary policy affect the future trend of the gold market? In short, a low interest rate environment is generally perceived by the market as positive for precious metals.
Yellow metals are zero-yield assets, meaning they typically cannot generate sustained income through interest, dividends or rent, and their value depends entirely on the potential for price appreciation.
When market interest rates are high, holding gold incurs an opportunity cost - after all, investors can instead allocate funds to bonds that generate interest income or stocks that pay dividends.
However, when real interest rates decline or even turn negative, the relative advantages of such income-generating alternative assets will be significantly weakened; in this environment, the relative cost of holding precious metals such as gold and silver will decrease accordingly, thereby enhancing their attractiveness as a safe-haven tool and wealth preservation vehicle.
Loose monetary policy is inherently inflationary. The core rationale behind interest rate cuts is to release liquidity by stimulating borrowing and spending (in other words, encouraging increased debt). Under fractional reserve banking, banks create new money through lending; by definition, this process directly contributes to inflation.
While the market generally perceives monetary policy as tightening, this is not the case—for over a year or so, the money supply has been expanding. This, by definition, constitutes inflation. Therefore, the market is already experiencing an inflationary environment, and the central bank is poised to further increase its stimulus.
This is also another key logic why interest rate cuts are beneficial to gold: gold has particularly effective anti-inflation properties and can protect investors' wealth from the erosion of the continued depreciation of the US dollar.
The real interest rate is the nominal interest rate reported in the news, adjusted for price inflation. The calculation of the real interest rate is straightforward: subtract the increase in the Consumer Price Index (CPI) from the published nominal interest rate.
For example, if the yield on a 10-year U.S. Treasury bond is 4%, the return performance appears to be acceptable on the surface; but if the CPI rises by 3.5% at this time, the actual interest rate of the bond will only be 0.5% (4%-3.5%=0.5%).
It is important to note that in a low-interest rate environment or when price inflation levels rise significantly, real interest rates may fall into negative territory.
Using the 10-year Treasury bond example above, if its yield is only 3% and the CPI rises by 5%, the real interest rate is -2%. This means that if an investor buys and holds this bond (assuming other market conditions remain unchanged), their actual wealth will shrink.
If calculated based solely on current CPI data, the current real interest rate is in the range of 1.6% to 1.25% (that is, the Federal Reserve's federal funds rate minus the current CPI increase of 2.9%).
If the Federal Reserve cuts interest rates by 25 basis points as expected, the average real interest rate will fall below 1%. If it follows through with two or three more rate cuts, real interest rates will officially enter negative territory. Furthermore, if price inflation continues to rise, the process of real interest rates turning negative will accelerate further.
It's important to note that the true price inflation rate is actually higher than what the CPI reflects. The US government revised its CPI calculation methodology in the 1990s, causing it to underestimate actual price increases. If the CPI calculation method from the 1970s were used, the current CPI increase would be nearly double the official figure. In other words, combined with the 2.9% CPI increase currently reported by the US Bureau of Labor Statistics (BLS), the actual CPI increase using the old methodology could be closer to 6%.
In other words, real interest rates may have already been in negative territory, which means that there may no longer be an opportunity cost to holding gold.
This is undoubtedly a very strong positive driving signal for the precious metals market - it also explains why gold prices rise every time the Federal Reserve releases hints of interest rate cuts. At the same time, this is also one of the core reasons why many analysts believe that the gold rally still has sufficient sustainability.
In reality (though Fed officials would never publicly admit it), central bankers prefer negative real interest rates because it would help ease the burden of the government's massive debt. Keeping a close eye on real interest rates is crucial for investors: without understanding the core logic behind real interest rates, it's easy to be misled by media headlines that hype rising interest rates while ignoring the crucial fact that real interest rates are negative.
The core impact of the Fed's rate cuts on gold lies in real interest rates. While the market has already priced in the Fed's interest rate cut expectations, traders may shift to trading inflation expectations later as inflation undervaluation becomes apparent. Currently, US inflation is significantly underestimated (the official CPI is lower than the true level due to statistical caliber errors), which means that real interest rates may have already turned negative, eliminating the opportunity cost of holding gold and supporting further price increases.
The market may focus on "correcting underestimated inflation expectations" in the future. Combined with loose monetary policy boosting money supply, gold still has upward momentum. Traders should closely monitor inflation data such as CPI and PCE to accurately grasp the trading rhythm.
Judging from the trend of spot gold, we adjusted the initial X-line to the recent rising trend line, and the target price for measuring the increase was also raised to 3,800 points.
(Spot gold daily chart, source: Yihuitong)
At 17:56 Beijing time, spot gold was trading at 3698.10.
Gold prices have already priced in and benefited from the expected rate cut, so the rate cut itself is unlikely to cause significant fluctuations; its impact is already factored into current pricing. However, from the perspective of real interest rates, reducing opportunity costs involves raising inflation, in addition to lowering the federal funds rate. Higher inflation would also significantly benefit gold prices. Technically, gold prices could target 3,800.
The impact of loose monetary policy orientation and interest rate cuts on gold prices
Loose monetary policy is inherently inflationary. The core rationale behind interest rate cuts is to stimulate lending and consumption, thereby releasing liquidity. Market expectations are that the Federal Reserve will cut interest rates by at least 25 basis points this week, lowering the federal funds rate to a range of 4% to 4.25%.
Gold prices have already priced in and benefited from the expected rate cut, so the rate cut itself is unlikely to cause significant volatility, as its impact is already factored into current pricing. The key driver of post-meeting market reaction will be the policy guidance released by the Federal Open Market Committee (FOMC). If Powell hints at further rate cuts, gold prices are expected to surge further. However, if Powell and his team suddenly shift to a hawkish stance, signaling that future rate cuts are limited, this could put downward pressure on precious metals prices.
But from a long-term perspective, how will this apparent shift to looser monetary policy affect the future trend of the gold market? In short, a low interest rate environment is generally perceived by the market as positive for precious metals.
Gold and real interest rates
Yellow metals are zero-yield assets, meaning they typically cannot generate sustained income through interest, dividends or rent, and their value depends entirely on the potential for price appreciation.
When market interest rates are high, holding gold incurs an opportunity cost - after all, investors can instead allocate funds to bonds that generate interest income or stocks that pay dividends.
However, when real interest rates decline or even turn negative, the relative advantages of such income-generating alternative assets will be significantly weakened; in this environment, the relative cost of holding precious metals such as gold and silver will decrease accordingly, thereby enhancing their attractiveness as a safe-haven tool and wealth preservation vehicle.
Inflation factors, the inflation drivers of loose policies and the anti-inflation value of gold
Loose monetary policy is inherently inflationary. The core rationale behind interest rate cuts is to release liquidity by stimulating borrowing and spending (in other words, encouraging increased debt). Under fractional reserve banking, banks create new money through lending; by definition, this process directly contributes to inflation.
While the market generally perceives monetary policy as tightening, this is not the case—for over a year or so, the money supply has been expanding. This, by definition, constitutes inflation. Therefore, the market is already experiencing an inflationary environment, and the central bank is poised to further increase its stimulus.
This is also another key logic why interest rate cuts are beneficial to gold: gold has particularly effective anti-inflation properties and can protect investors' wealth from the erosion of the continued depreciation of the US dollar.
Definition, calculation and negative value scenarios of real interest rates
The real interest rate is the nominal interest rate reported in the news, adjusted for price inflation. The calculation of the real interest rate is straightforward: subtract the increase in the Consumer Price Index (CPI) from the published nominal interest rate.
For example, if the yield on a 10-year U.S. Treasury bond is 4%, the return performance appears to be acceptable on the surface; but if the CPI rises by 3.5% at this time, the actual interest rate of the bond will only be 0.5% (4%-3.5%=0.5%).
It is important to note that in a low-interest rate environment or when price inflation levels rise significantly, real interest rates may fall into negative territory.
Using the 10-year Treasury bond example above, if its yield is only 3% and the CPI rises by 5%, the real interest rate is -2%. This means that if an investor buys and holds this bond (assuming other market conditions remain unchanged), their actual wealth will shrink.
If calculated based solely on current CPI data, the current real interest rate is in the range of 1.6% to 1.25% (that is, the Federal Reserve's federal funds rate minus the current CPI increase of 2.9%).
If the Federal Reserve cuts interest rates by 25 basis points as expected, the average real interest rate will fall below 1%. If it follows through with two or three more rate cuts, real interest rates will officially enter negative territory. Furthermore, if price inflation continues to rise, the process of real interest rates turning negative will accelerate further.
The hidden state of real inflation rate and real interest rate means that gold may no longer have an opportunity cost
It's important to note that the true price inflation rate is actually higher than what the CPI reflects. The US government revised its CPI calculation methodology in the 1990s, causing it to underestimate actual price increases. If the CPI calculation method from the 1970s were used, the current CPI increase would be nearly double the official figure. In other words, combined with the 2.9% CPI increase currently reported by the US Bureau of Labor Statistics (BLS), the actual CPI increase using the old methodology could be closer to 6%.
In other words, real interest rates may have already been in negative territory, which means that there may no longer be an opportunity cost to holding gold.
This is undoubtedly a very strong positive driving signal for the precious metals market - it also explains why gold prices rise every time the Federal Reserve releases hints of interest rate cuts. At the same time, this is also one of the core reasons why many analysts believe that the gold rally still has sufficient sustainability.
In reality (though Fed officials would never publicly admit it), central bankers prefer negative real interest rates because it would help ease the burden of the government's massive debt. Keeping a close eye on real interest rates is crucial for investors: without understanding the core logic behind real interest rates, it's easy to be misled by media headlines that hype rising interest rates while ignoring the crucial fact that real interest rates are negative.
In summary
The core impact of the Fed's rate cuts on gold lies in real interest rates. While the market has already priced in the Fed's interest rate cut expectations, traders may shift to trading inflation expectations later as inflation undervaluation becomes apparent. Currently, US inflation is significantly underestimated (the official CPI is lower than the true level due to statistical caliber errors), which means that real interest rates may have already turned negative, eliminating the opportunity cost of holding gold and supporting further price increases.
The market may focus on "correcting underestimated inflation expectations" in the future. Combined with loose monetary policy boosting money supply, gold still has upward momentum. Traders should closely monitor inflation data such as CPI and PCE to accurately grasp the trading rhythm.
Judging from the trend of spot gold, we adjusted the initial X-line to the recent rising trend line, and the target price for measuring the increase was also raised to 3,800 points.
(Spot gold daily chart, source: Yihuitong)
At 17:56 Beijing time, spot gold was trading at 3698.10.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
