Fed Hike Odds Hit 90 Percent, and Gold Barely Flinched

By the textbook, Friday should have been a bad day for gold. The August inflation report pushed the odds of a Federal Reserve rate hike to roughly 90 percent, and higher interest rates usually weigh on gold because the metal pays no yield and competes with interest-bearing assets. Instead, gold held its ground near 4,385 dollars an ounce, shrugging off a move that in theory should have hurt it.

The reason it held is the dollar. Gold is priced in dollars, so its biggest day-to-day driver is often the currency rather than the rate directly, and on Friday the dollar strengthened only briefly before fading, with the dollar index climbing toward 99.36 and then slipping back near 99. A hike that fails to lift the dollar does not do much damage to gold.

The backdrop explains gold's broader strength this year. The metal has rallied alongside a soft dollar, steady central-bank buying and persistent geopolitical risk, and none of those supports vanished just because a single hike became likely. Gold has been leaning on forces bigger than one Fed meeting.

The tension sits between the rate and the currency. A rate hike is designed to make the dollar more attractive, and if Wednesday's decision and guidance finally give the dollar a durable lift, that is the most direct threat to gold's roughly 4,300 to 4,400 floor. So far the dollar has not followed through, and that is exactly why gold has stayed firm.

The caution is that the test is still ahead. The hike itself is nearly priced, but a hawkish Fed that points to more increases could push yields and the dollar higher together, and that combination, not the hike alone, is what could finally crack gold's recent range. The metal has passed the inflation test. The dollar test comes Wednesday.

So gold has quietly defied the odds, holding firm even as a rate hike moved from maybe to near certain. Near 4,385, dollar flat, floor intact. Gold ignored a 90 percent hike bet and held its ground. The thing that can finally move it is not the rate, it is the dollar the rate revives.