Gold Futures in Flux: Assessing the impact of unexpected FOMC decisions

This study, covering the period from 1993 to 2023, offers a novel analysis of the gold futures market’s response to unexpected Federal Open Market Committee (FOMC) rate surprises. Out of 249 FOMC announcements, 25 instances of notable rate surprises were identified and analyzed for their impact on short-term gold futures trading patterns. While prior research has extensively examined the influence of commodity prices on macroeconomic indicators and the impact of monetary policy on financial variables such as interest rates, exchange rates, and the stock market, the specific response of commodities, specifically gold futures, to monetary policy shocks has remained largely unexplored. The study uncovers some degree of homogeneity in the magnitude and direction of response to positive and negative surprises across different policy regimes. The research detects a consistent pattern in the market’s reaction to both unforeseen rate cuts and hikes, regardless of the prevailing policy environment. Regression analysis yields a statistically significant positive correlation, denoted by a p-value of 0.083, between the rate surprises and a subsequent increase in Gold Futures prices—specifically, a 1.0924% rise for each percentage point of surprise over a two-day horizon. However, the model’s limited explanatory power, coupled with the findings, underscores the presence of additional factors influencing gold futures prices. The results of this exploration question the traditional perception of gold as a safe-haven asset, exemplified in periods of economic distress like the 2008 Global Financial Crisis and the 2020 pandemic-induced market turmoil, and prompt a re-evaluation of its role and reliability in the face of monetary policy-induced market shocks.