On Tuesday (October 6) in early Asian trading, spot gold traded around $4,140 per ounce. Gold prices held steady on Monday, with pressure from a stronger dollar and high US Treasury yields offset by weakening market expectations for a Fed rate hike this month. By the close of New York trading on Monday, spot gold settled at $4,140.28 per ounce, almost unchanged for the day. December US gold futures fell 0.1% to settle at $4,156.80 per ounce. A rising dollar index made dollar-denominated gold more expensive for investors holding other currencies; meanwhile, the yield on the 10-year US Treasury note rose to 5.3493% and the 30-year yield rose to 5.7029%, both reaching new 24-year highs. The market is currently pricing in a 22% probability of a Fed rate hike in October and an 84% probability in December. Investors await the release of the minutes from the Fed's September FOMC meeting on Wednesday to determine the future direction of monetary policy.

Interest rate hike expectations are cooling: the probability of an October hike has dropped to 22%, while the probability of a December hike remains as high as 84%.

Recent U.S. economic data has largely fallen short of expectations, leading the market to reduce its bets on interest rate hikes. Data released last Friday showed that U.S. job growth slowed more than expected in September, and non-farm payroll data for the previous two months were revised downwards, weakening market expectations for a Fed tightening this month. According to the CME FedWatch Tool, traders now expect a 22% chance of a Fed rate hike in October, down from about 70% last week. However, they still expect an 84% chance of a Fed rate hike in December. This divergence has complex implications for gold: the lower probability of an October rate hike provides some support for gold prices, but the still high probability of a December rate hike suggests that the broader policy outlook remains skewed towards tightening. The Fed raised rates for the first time in three years last month, and investors are awaiting the release of the September FOMC meeting minutes later this week, which could help determine the future direction of monetary policy.

US Dollar and Treasury Yields: The dollar strengthened, pushing 10-year and 30-year yields to new 24-year highs.

A stronger dollar is a key factor suppressing gold prices. Market analyst Fawad Razaqzada stated, "Gold prices may fall in the short term before buyers enter the market in large numbers, entirely due to the continued rise of the dollar and persistently high yields." The rising dollar index makes dollar-denominated metals more expensive for investors holding other currencies. The movement of US Treasury yields is even more noteworthy. On Monday, US Treasury yields generally rose, with the 10-year and 30-year yields hitting new 24-year highs, as negative sentiment recently dominating the bond market prevailed. The benchmark 10-year Treasury yield rose 3.4 basis points to 5.311%, having earlier reached 5.3493%; the 30-year Treasury yield rose 3.2 basis points to 5.662%, having earlier reached 5.7029%. Both hit new 24-year highs. The much-watched spread between the two-year and 10-year yields was 48.8 basis points, having earlier reached 49.70 basis points, the steepest since August 21.

Economic data: ISM services sector slows but input prices hit four-year high.

Economic data suggests that inflation may remain high until 2027, pushing yields to remain at high levels. A report from the Institute for Supply Management (ISM) showed that U.S. service sector activity slowed in September, but strong domestic demand put pressure on supply chains and pushed the business input price index to its highest level in more than four years. "There's nothing in these data that's driving Treasury yields in the opposite direction," said Jim Barnes, head of fixed income at Bryn Mawr Trust. He added that fiscal problems in other countries continue to put pressure on the U.S. Treasury market. "This is the overarching theme that has been hanging over the bond market—fiscal problems in several developed markets around the world. When something goes wrong somewhere, it starts to affect global bond markets, and we're seeing some of that today." Global bond markets were generally sold off, pushing yields higher, influenced by government debt problems in France and other countries, as well as concerns about inflation and rising oil prices stemming from the conflict in Iran.

Institutional View: Metals Focus predicts gold prices will reach a record high in 2027.

Despite short-term pressures, the long-term outlook remains positive for gold. Precious metals consultancy Metals Focus predicts that gold prices will reach a record high in 2027 as investors seek alternatives to traditional dollar-denominated assets, with an expected average price of $5,330 per ounce. This forecast is based on the long-term logic of rising investor demand for dollar-denominated assets, contrasting with the current short-term pressures.

Market Outlook

Looking ahead, investors are awaiting the release of the minutes from the Federal Reserve's September FOMC meeting later this week. The Fed raised interest rates for the first time in three years last month, and these minutes could help determine the future direction of its monetary policy. In addition, investors will be watching the upcoming Treasury auction. Weak demand at last month's auction exacerbated the recent sell-off in the bond market. Molly Brooks, U.S. interest rate strategist at TD Securities, said, "We've seen some weak data that should have driven the bond market higher, but yields are still rising slowly. This sentiment continues to pervade the market, so without much data release, the base case scenario is that yields will likely continue to rise slowly based solely on market sentiment." This means that for gold, the upside potential may remain limited in an environment where yields continue to rise due to market sentiment rather than data.

Summarize

Gold is currently in a tug-of-war between bulls and bears. The probability of an October rate hike falling to 22% has provided some support for gold prices, but the probability of a December rate hike remains as high as 84%, indicating a broader policy outlook still leaning towards tightening. A stronger dollar and the 10-year and 30-year US Treasury yields hitting new 24-year highs are the core factors suppressing gold prices. ISM data shows a slowdown in service sector activity but input prices hitting a four-year high, suggesting that inflation may remain high until 2027, further supporting high yields. Institutional long-term forecasts for gold prices in 2027 remain optimistic, but in the short term, gold prices may fall first before buyers enter the market in large numbers. The FOMC meeting minutes and subsequent inflation data will be key catalysts determining the short-term direction of gold. Under the pressure of a strong dollar and high yields, gold is likely to maintain range-bound trading in the short term, with the $4130-$4160/ounce area becoming a key battleground between bulls and bears. (Spot gold daily chart, source: EasyTrade) At 7:40 Beijing time, spot gold was trading at $4138.35 per ounce.