Gold's Two-Speed Market: Central Banks Load Up While Traders Weigh a Hawkish Fed

Gold climbs to $4,215 as softer dollar and Fed cut bets outweigh geopolitical risk reduction from Strait of Hormuz talks.

The diplomatic thaw taking shape in the Persian Gulf is doing something unusual for gold: pushing prices higher even as it strips away the geopolitical risk premium that has historically fueled rallies. The precious metal climbed 1.96 percent on Wednesday to $4,215.40 per troy ounce, building on Tuesday's 0.80 percent advance to $4,143.60 and lifting the weekly gain to 2.17 percent. The catalyst? Reports that the United States, Iran, and Oman are closing in on an agreement to reopen the Strait of Hormuz — a development that has sent oil prices sliding and the dollar softening, two forces that typically provide a tailwind for bullion.

A Recovery, Not a Resurgence

The current bounce needs context. Gold remains roughly 25 percent below its 52-week high of $5,586.20, a peak reached in late January before a brutal correction that saw prices fall around 29 percent to $3,942 by June 30. Wednesday's close places the metal just above its 50-day moving average of $4,179.49 — a sign of stabilization rather than a return to record territory. The World Gold Council sees the second half of the year playing out in a range around $4,100 per ounce, though it acknowledges that an escalation of geopolitical tensions could push prices toward $4,500 to $5,000.

The near-term direction, however, hinges less on the Middle East and more on the Federal Reserve. Market probabilities for a September rate hike slipped from roughly 67 percent to about 59 percent during Wednesday's session, a shift that lowers the opportunity cost of holding non-yielding assets like gold. That repricing came as Fed officials offered diverging views on the path ahead.

Hawks and Doves at the Fed

Kansas City Fed President Jeff Schmid struck a decidedly hawkish tone, calling for tighter policy to bring inflation back to the central bank's 2 percent target. He described price pressures as "too high" and "worrisome," noting that inflation has exceeded the target for more than five years, and warned of systemic risks tied to the financing conditions of the AI buildout. The Fed has held its policy rate at 3.50 to 3.75 percent, though three officials voted for a quarter-point increase at the last meeting.

Philadelphia Fed President Anna Paulson offered a more measured assessment, characterizing the recent improvement in inflation data as merely "one step" and estimating underlying inflation at 2.4 to 2.8 percent. Moody's chief economist Mark Zandi added a note of caution, warning that the Fed's vague forward guidance could trigger a market shock and pegging the probability of a recession within twelve months at 40 percent.

Central Banks Step In

While traders wrestle with Fed policy, the structural demand picture has rarely looked stronger. Central banks purchased a net 289 tonnes of gold in the second quarter — a record for the period and a 62 percent increase year-over-year, according to the World Gold Council. June alone saw 51 tonnes of net buying, led by Poland with 19 tonnes, followed by China with 15 tonnes and Uzbekistan with 9 tonnes. Russia and Turkey, meanwhile, trimmed their holdings. China's reserves now stand at 2,331.52 tonnes, marking 19 consecutive months of accumulation.

The most striking development came from Seoul. The Bank of Korea announced it would resume purchasing physical gold for the first time since 2013, initially through overseas gold ETFs while building a framework to acquire domestically produced metal via the Korea Exchange and Korea Securities Depository, with transactions routed through producers LS MnM and Korea Zinc. The central bank plans to buy four to five tonnes annually from domestic production, with official Jeong Hee-sup signaling a "gradual increase" in purchases over the medium to long term. The move reflects both geopolitical risk concerns and a desire to diversify away from the dollar. Korea's current holdings of 104.4 tonnes represent just 1.1 percent of its $427.36 billion in reserves — a low share by international standards. The central bank's previous foray into gold, buying roughly 90 tonnes near a then-record high between 2011 and 2013, has since appreciated considerably.

A Divergence of Views

The World Gold Council's survey data reinforces the bullish structural narrative: 89 percent of central banks polled expect global gold reserves to keep rising over the next twelve months. But the investor community remains split on where prices head from here. Hedge fund manager John Paulson sees the start of a long-term bull market in gold, yet prefers mining equities — particularly exploration companies — over physical metal. He recently acquired a 40 percent stake in the Donlin gold project in Alaska through a share transaction and will become co-chairman of NovaGold, with existing NovaGold shareholders retaining 65 percent of the combined entity. The Donlin project holds roughly 40 million ounces of resources, and NovaGold carries a market value of about $4.2 billion.

At the more bullish end of the spectrum, the "In Gold We Trust" report projects prices as high as $8,900 by the end of the decade. OANDA analyst Kelvin Wong sees further upside for gold even if tensions in the Middle East ease. For the immediate term, all eyes turn to Friday's US employment data, with the ADP report due Wednesday afternoon offering an early read. Those figures will likely determine whether the September rate hike probability holds near 59 percent or shifts once again — and with it, the near-term trajectory for a metal caught between diplomatic headlines and central bank accumulation.