Gold, Rate Cuts & the U.S. Dollar

Precious metals remained at the forefront of investment markets this week, with the widely expected interest rate cut from the US Federal Reserve further stimulating demand for both gold and silver, which have led markets higher in 2025.

The demand is both a global, as well as Australian phenomenon, and is being seen first-hand at ABC Bullion, with new account creations, trade volumes, and Gold Saver activations matching some of the busiest periods we have seen in the past four years.

Price wise, both metals experienced a mid-week dip, something that often happens in the lead into a meeting of the US Federal Reserve board, with gold last trading at USD $3,645oz, having pushed up toward USD $3,700oz in recent days.

Silver has also consolidated, last trading just below USD $42oz, after having trading traded as high as USD $42.62oz, while in Australian dollar terms gold is still holding strong above AUD $5,500oz, with silver approaching AUD $63.50oz.

This period of consolidation, which may play out for some time, would be a welcome and in many ways healthy development in this secular bull market, especially with gold now trading more than 15% above its 200-day moving average (200DMA), with the 200DMA just over USD $3,110oz.

The longer-term picture remains favourable, with analysts at Deutsche Bank suggesting gold will hit USD $4,000oz in 2026, with silver set to rise to USD $45oz. Meanwhile, we have seen Morgan Stanley Chief Investment Officer Mike Wilson suggest that clients should hold up to 20% of their assets in gold (famed bond investor Jeffrey Gundlach of Double Line suggests even 25% might be appropriate ), with Wilson claiming the precious metal provides greater inflation protection in a portfolio, as well as an asset that performs when real rates fall.

Looking ahead, the movement of interest rates, and the movement in the value of the US Dollar are going to remain two key drivers for bullion.

We explore both relationships below in detail, with history suggesting it is right to remain bullish on gold, even if prices are set to remain volatile in the short-term.

USD Gold vs US Fed Funds Effective Rate:

On September 17th, the Federal Reserve (Fed) delivered its first rate cut of the year, lowering the fed funds rate by 25 basis points (now at a range of 4% to 4.25%). Fed officials also signalled that two further 25 basis point cuts are likely before the end of 2025, while projecting just one across 2026.

These decisions reflect the Feds cautious approach in balancing two conflicting objectives of curbing inflation and supporting a softening labour market. This is a delicate tight rope at the best of times, but especially today given we are amid an economic environment where the risk of a stagflation scenario playing out is increasingly likely.

The Fed’s latest economic projections anticipate unemployment edging higher to 4.5% by year-end, before moderating slightly in 2026–27. Meanwhile, inflation, as measured by the Feds preferred Personal Consumption Expenditures (PCE) index, remains stubbornly above their 2% target, with core PCE expected at 3.1% in 2025.

Fed Chair Jerome Powell emphasised that “downside risks to employment appear to have risen,” highlighting the central bank’s willingness to ease policy further if economic growth slows.

Historically, gold has rallied strongly in environments coinciding with periods of falling interest rates, with this relationship notably strengthening since the collapse of the dot-com bubble in the early 2000s (Figure 1). Lower yields reduce the opportunity cost of holding non-yielding assets such as gold, driving investors away from assets like cash and bonds and towards precious metals as both a hedge and a potential source of capital appreciation.

This dynamic is particularly evident over the past year where gold has surged to a record high, up 41% and 32% year to date in USD and AUD terms respectively, supported by expectations of continued monetary easing in the US over the medium term.

Markets are already pricing in a 93% probability of another 25-basis point cut when the fed meets again on the 30^th of October, reinforcing gold’s bullish outlook. Considering the current economic backdrop in the US and the longstanding inverse relationship between real interest rates and gold prices (Figure 1), continued rate cuts are likely to act as a medium-term tailwind for precious metal prices. 

Figure 1: USD Gold vs US Fed Funds Effective Rate (Dec 1969 – Sep 2025)

Source: LBMA, Federal Reserve Bank

USD Gold vs USD Strength Index (DXY):

Alongside monetary policy, movements in the US dollar, proxied by the USD strength index (DXY), remain a significant driver for gold prices. The exceptional gains in gold year to date have been supported not only by expectations of further rate cuts, but also by persistent and further weakness in the dollar. A softer USD makes gold more affordable for non-US buyers (as gold is priced in USD), amplifying demand from overseas investors.

The dollar’s decline reflects both cyclical and structural forces. In the near term, rate cuts erode the relative appeal of USD-denominated assets. More broadly, confidence in US assets have diminished, with many countries diversifying reserves away from USD and US Treasuries (traditional reserve assets) and further into gold.

This trend is made clear by strong central bank accumulation, particularly across emerging markets with over 4000 tonnes accumulated globally since 2021. Robust ETF inflows and physical bar and coin demand further demonstrate this trend from a retail perspective, with global ETF holdings (tonnes) nearing levels experienced during the peak of the COVID pandemic.

The inverse correlation between gold and the DXY is made clear within Figure 2, with the relationship having particular significance during both the peak of the COVID pandemic in 2022 and the inauguration of President Trump in January 2025.

His administration’s tariff-driven trade policies, coupled with rising fiscal deficits (US debt to GDP ratio at 120% as of Q2 2025) and Trump himself undermining the Feds independence in recent times, have weighed on the greenback while boosting the appeal of hard assets.

As a result, the current economic climate, characterised by a dovish Fed stance, stretched equity market valuations and structural pressure on the USD suggests that golds recent rally is underpinned by strong fundamentals even if a pullback from overbought levels wouldn’t surprise.

 The historical relationship between the USD and gold is once again proving decisive and with further dollar weakness paired with ongoing rate cuts likely on the horizon, gold remains well positioned to continue to outperform other key asset classes across the rest of 2025 and beyond.

Figure 2: USD Gold vs USD Strength Index (Dec 1999 – Sep 2025)

Source: LBMA, Yahoo Finance

Jordan Eliseo
General Manager, ABC Bullion

Luke Tyler
Market and Business Analyst, ABC Bullion

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