In-demand gold and silver brace for Fed decision

Key Points:

• Gold and silver see profit taking from record and 14-year highs ahead of pivotal FOMC rate decision.
• Both metals have rallied strongly over the past six weeks amid softer labor market data, and Fed Chair Powell's pivot at Jackson Hole
• The structural backdrop has been underpinned by strong investor flows into exchange-traded funds where year-to-date inflows have more than reversed the outflows seen in the previous two years
• A minimum correction based on the 38.2% Fibonacci retracement would imply a decline of around 4% for gold to about USD 3,555, and 5.5% for silver to about USD 40.70

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The Federal Reserve’s policy decision today carries significant weight for the precious metals markets, with both gold and silver having rallied strongly over the past six weeks as softer labor market data, and Fed Chair Powell's pivot at Jackson Hole revived expectations for a resumption of the rate cutting cycle. After being paused in December following a one‑percent reduction between September and December, easing looks set to resume with a 25 basis point cut priced in for today. A succession of US rate cut expectations, starting today, together with persistent investor demand through ETFs, and renewed dollar weakness saw gold briefly top USD 3,700 while silver traded close to USD 43.

What markets have priced in

The FOMC is projected to lower borrowing costs today for the first time in 2025, with a quarter-point reduction being fully priced in. But a cooling labor market has seen traders increasing options wagers that the FOMC will deliver at least one half-point cut at one of the two remaining policy meetings this year. 

The latest Summary of Economic Projections will show whether officials are comfortable validating the market’s view of three cuts in 2025, or whether they want to temper expectations. Chair Jerome Powell’s press conference will be critical in managing this balance.

Dollar under pressure

One of the clearest macro drivers for gold and silver has been the renewed weakness in the U.S. dollar. The Bloomberg Dollar Spot Index has slipped to its lowest level since March 2022, extending a decline that began when softer labor market data pushed traders to price in a sequence of cuts. A weaker dollar raises the relative value of commodities priced in USD, and for gold it reinforces its appeal as a global store of value.

Real yields tell a similar story. Ten-year Treasury Inflation-Protected Securities currently yield around 1.64%, an 11-month low, down from a January peak at 2.32%. That level of real return remains low enough to support investor appetite for non-yielding assets such as bullion. 

ETF demand hits multi-year high 

The structural backdrop has been underpinned by strong investor flows into exchange-traded funds. According to the World Gold Council, global gold ETF holdings rose to nearly 3,700 tonnes at the end of August—the highest month-end level since mid-2022. Year-to-date inflows are among the strongest on record, more than reversing the outflows seen in the previous two years.

In dollar terms, ETFs have absorbed around USD 25–30 billion of gold this year. For comparison, that represents almost 10% of annual mine supply, highlighting the impact of financial flows on market balance. Lower funding costs—one of the direct results of Fed easing—reduce the opportunity cost of holding bullion and should continue to underpin ETF demand.

Silver has also enjoyed a revival in investment demand. The world’s largest silver ETF, SLV, currently holds more than 15,000 tonnes, while smaller funds have also seen renewed inflows as prices pushed toward cycle highs.

Fed independence and the political angle

While today’s outcome is broadly anticipated, one potential wild card is the composition of the vote. A decision that splits along party lines, or a debate that appears politically motivated, could raise fresh questions about the Fed’s independence. That matters for gold because any erosion of confidence in the central bank’s autonomy could trigger concerns about unanchored inflation expectations and fiscal sustainability. Historically, such fears have translated into a higher risk premium for bullion.

Correction risks: Fibonacci retracements

Technically, the market looks extended after a sharp rally since late August. A minimum correction based on the 38.2% Fibonacci retracement would imply a decline of around 4% for gold, taking it down from the USD 3,703 peak to about USD 3,555. For silver, the equivalent pullback would be roughly 5.5%, from USD 42.97 to about USD 40.70. Importantly, such a retracement is generally viewed as a shallow correction within a strong uptrend. In other words, a setback to those levels would not necessarily undermine the broader bullish case. For that to be challenged gold would need to drop below USD 3460 and silver USD 39.25, both levels that are currently projected by firm support at higher levels. 

Scenarios for the decision

• Dovish 25 bp cut: A straightforward cut accompanied by guidance that leaves the door open for further easing this year. Likely outcome: dollar weakness persists, real yields stay capped, and gold and silver extend gains after a brief consolidation.
• Hawkish 25 bp cut: A cut accompanied by messaging that future moves will be limited unless data deteriorates. Likely outcome: an extended period of profit taking seeing the dollar bounce with gold and silver moving closer to the mentioned support levels. 
• 50 bp surprise: Low probability. Would raise questions about whether the Fed is reacting to a deeper growth scare, or political pressure. Any perceived split or political angle could still push gold higher via risk premium.
• No cut: Extremely low probability. Would shock markets, strengthen the dollar sharply, and trigger a deeper correction in metals.