Happy Tuesday, GoldBuzzers!

Something strange happened yesterday. Oil had one of its worst days since the conflict began, the kind of drop that usually sends gold rocketing. Instead, gold barely moved.

Today I'll show you why that hesitation makes complete sense, and what it has to do with tomorrow's big Fed announcement.

O️k. Let’s get into it. ⬇️

Brent crude tumbled as much as nine percent on Monday after Washington paused its strikes on Iran and Tehran said it'd hold fire as long as the US does the same. Cheaper oil means cooler inflation pressure, and cooler inflation pressure gives the Federal Reserve less reason to keep tightening. Add a softer dollar and you've got exactly the backdrop metals like.

All eyes now turn to Wednesday, when the Fed wraps up its two-day meeting. Markets expect rates to stay put this week, but traders are still pricing in roughly an 80 percent chance of a hike in September. If this pause in hostilities holds, that number could start to slide - and the metals would like that even more.

Monday handed us an oddity worth pondering. Crude oil had one of its worst days since the conflict began, with WTI falling almost nine percent to around $83 after the United States and Iran paused hostilities over the weekend. A drop like that takes real pressure off inflation, and easing inflation is normally rocket fuel for metals that pay no yield.

Instead, both gold and silver barely managed a ½ percent gain. Both metals traded much better overnight, with gold pushing through $4,100 and silver brushing against $60, then spent the entire US session leaking those gains back.

That's not a rebound. That's a market in a holding pattern, and the reason is very clearly sitting on Wednesday's calendar.

The Federal Reserve wraps up its July meeting tomorrow - Wednesday, July 29, with the decision due at 2 pm Eastern and Chair Kevin Warsh's press conference at 2:30.

I’ve had several emails over the past few days asking why this Fed meeting is so important and I want to briefly address the key points.

Firstly, let’s remember that Gold pays no interest. Right now, a 10-year US Treasury yields about 4.7 percent, meaning $100,000 in government bonds earns roughly $4,700 a year while the same money in gold earns nothing. That's the hurdle. When rates rise, that hurdle gets taller and some investors sell gold to jump to the guaranteed payout. When rates fall, the hurdle shrinks, gold's missing yield matters less, and a softer dollar usually helps too, since gold is priced in dollars..

You'll also hear a lot of what I call “bird language” this week too, so let's translate it. “Hawkish” means the Fed sounds worried about inflation and leans toward raising rates or keeping them high. “Dovish” means it sounds more relaxed about inflation and leans toward cutting rates. Gold generally dislikes hawks and likes doves!

And this week, the hawks have the microphone. Nobody’s pricing a rate cut. Markets put the odds of no change at roughly 62 to 65 percent, with the rest expecting an increase, and expectations for a September increase have now climbed above 80 percent.

After five years of above-target inflation, Warsh has shown little patience, and he's stopped telling markets what he plans to do next. That’s why Monday’s limp price action makes perfect sense. Why chase gold on Monday's oil news when Wednesday's Fed news could take it right back?

Silver told the same story, just with more drama. It ran harder overnight and gave back more by the close, which is its usual personality - its dual role as monetary metal and industrial commodity exaggerates whatever gold does, in both directions.

The bottom line is that rates are very likely to stay put. The thing to listen for is what he says about September. If Warsh signals the next meeting is live for an increase, metals likely give back Monday's gains. If he leaves the door open to patience, the bounce gets a lot more room to breathe.

That’s all for this Tuesday, folks. I’ll see you on Thursday.

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Rick Adams
Founder, GoldBuzz
rick@goldbuzz.com