Week 5, Section 2: The Relationship Among Crude Oil, Interest Rate Hikes, and Gold

The second question is: exactly how does raising interest rates alleviate inflationary pressure? At its core, it does just one thing: cool down the economy—making people spend less and borrow less, thereby reducing overall demand and curbing price increases. This works through three specific channels. First, making money more expensive to suppress borrowing and consumption. After an interest rate hike, interest rates on credit cards, auto loans, and mortgages all rise. Your monthly repayment burden increases, leaving you with less disposable income—so you naturally dine out less, buy fewer clothes, travel less, and businesses face higher costs for borrowing to expand production, slowing their growth pace. As a result, aggregate demand across the entire economy is suppressed. Second, making saving more attractive by increasing returns on deposits. After an interest rate hike, interest rates on bank deposits and money market funds also rise. You can now earn solid, risk-free returns simply by keeping money in the bank—so why bother investing in stocks, real estate, or consumption goods? Consequently, part of the funds that would otherwise flow into consumption and investment gets drawn back into the banking system, reducing the amount of money circulating in the economy and lowering overall purchasing power. Third, strengthening the U.S. dollar to lower import prices. When the Federal Reserve raises rates, U.S. dollar-denominated assets (e.g., Treasury bonds) offer higher yields, attracting global capital to exchange into dollars and buy U.S. Treasuries. Increased demand for dollars drives dollar appreciation. A stronger dollar makes dollar-priced imports—such as crude oil, soybeans, and semiconductors—relatively cheaper. Lower import costs ease domestic price pressures. In short, interest rate hikes suppress aggregate demand, whereas rising oil prices push up costs on the supply side. However, if rate hikes simultaneously cool the economy—diminishing income expectations and weakening consumer spending—firms become reluctant to fully pass on higher oil-related costs to consumers, fearing reduced sales. Thus, demand-side suppression partially offsets cost-driven price transmission. Yet interest rate hikes come at a cost: while they tame inflation, they also dampen economic growth. If hikes are too aggressive, firms hesitate to invest and households cut back on spending—potentially tipping the economy from inflation into recession. Hence, the Fed’s toughest challenge lies in striking the right balance between fighting inflation and safeguarding growth. Next, I begin studying the relationship between interest rate hikes and gold. Interest rate hikes weigh on gold because gold generates no yield, whereas higher rates boost returns on other assets—raising the opportunity cost of holding gold. This can be broken down into three layers: First, gold itself yields no income. Whether you buy physical gold bars or gold ETFs, you receive no dividends, interest, or cash flow. Its sole profit mechanism is price appreciation—you only realize gains upon selling. Thus, holding gold ties up capital without generating any return. Second, rate hikes make holding non-yielding assets even costlier. After a Fed rate hike, returns on bank deposits, Treasury bonds, and money market funds rise. For instance, if deposit rates climb from 2% to 5%, $100,000 deposited earns $2,000 annually before the hike—but $5,000 after. Holding that same $100,000 in gold instead means forfeiting $5,000 in interest income—the $5,000 represents your opportunity cost of holding gold. The higher the interest rate, the greater this cost—and the less attractive gold becomes. Third, rising opportunity costs drive capital out of gold and into yielding assets. When U.S. Treasuries offer risk-free yields above 5%, institutional and large investors ask: Why hold a non-yielding asset like gold when I could sell it and earn passive interest via Treasuries? Thus, during hiking cycles, capital flows out of gold into bond markets and bank deposits, pressuring gold prices downward. Conversely, rate cuts benefit gold: lower deposit rates and falling Treasury yields shrink the opportunity cost of holding gold, prompting capital to flow back from bonds into gold. Consequently, gold prices typically move inversely with real interest rates (nominal interest rates minus inflation): higher real rates weigh on gold; lower real rates support it.

Inflation spirals out of control! Gold plunges—will the Fed hike rates again?

U.S. markets suddenly shifted course. On October 14, the U.S. released its September CPI data: year-on-year inflation rose to 3.7%, up from 3.4% in August and exceeding market expectations. Following the release, market concerns about another Fed rate hike intensified sharply. Gold prices fell, tech stocks in the U.S. equity market suffered heavy losses, while crude oil was supported by geopolitical tensions. What truly warrants attention here isn’t how much any single index dropped—but rather that the global market’s anticipated rate-cut scenario may not unfold as smoothly as previously imagined. I. Why has U.S. inflation rebounded? Let’s examine the data. U.S. September CPI rose 3.7% year-on-year and 0.6% month-on-month; core CPI rose 2.6% year-on-year and 0.3% month-on-month. Notably, gasoline prices surged 9.1% month-on-month—accounting for over half of the total monthly CPI increase. Rising energy prices were thus a major driver behind this inflation rebound. What does this mean? First, upward pressure on U.S. prices hasn’t disappeared. While the Fed aims to see inflation sustainably decline, surging energy prices have reignited inflationary momentum. Second, core CPI year-on-year rose from 2.4% to 2.6%, indicating the problem cannot be attributed solely to oil prices. Persistent price pressures remain in housing, airfares, healthcare, and other categories. That said, a rise in CPI alone doesn’t signal full-blown, runaway U.S. inflation. Core CPI month-on-month remained unchanged at 0.3%. What truly matters is whether price increases continue spreading across broader sectors in the coming months. Markets fear not high inflation per se—but rather inflation that refuses to recede. II. Will the Fed hike rates again? This is the pivotal factor behind all asset price volatility. Previously, markets debated only when the Fed would cut rates; now, investors must reconsider: if inflation rebounds persistently, might the Fed hike again? Following the CPI release, market bets on a potential October rate hike rose markedly. Though timing and pricing methodologies vary across data sources, the direction is consistent: investors are reassessing the risk of further rate increases. Crucially, heightened rate-hike expectations do not equate to an actual Fed decision to hike. The Fed must weigh employment, consumer spending, core inflation, and energy prices. If oil prices spike only temporarily, policymakers may opt to observe; but if energy prices keep rising and spill over into broader goods and services, pressure will mount to maintain elevated rates—or even hike again. Thus, what truly warrants vigilance going forward is the prospect of “higher-for-longer” interest rates. Even if the Fed holds rates steady for now, delaying rate cuts alone could trigger financial-market repricing. III. Why did gold fall while crude oil rose? Though both gold and crude oil serve as hedges against risk, their price drivers differ fundamentally. First, gold. Many assume gold should rally whenever inflation rises—a view that is incomplete. When rising inflation fuels market expectations of higher interest rates, the U.S. dollar and Treasury yields often strengthen. Since gold produces no yield, its opportunity cost rises—and short-term capital may shift toward higher-yielding alternatives. On October 14, spot gold fell roughly 1.8%, briefly touching around $4,084 per ounce. A stronger dollar and intensifying rate-hike expectations exerted clear downward pressure.

Gold Holds Decline as Energy-Led Inflation Weighs on Rate Path

Oct 19, 2026

Gold prices fell as elevated oil costs from Middle East tensions fueled inflation worries, impacting Federal Reserve interest rate expectations. Traders reduced bets on rate hikes following signals from Chair Kevin Warsh to keep rates on hold.

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Gold Holds Decline as Energy-Led Inflation Weighs on Rate Path

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