Gold prices steadied after falling more than 3% on Friday as US Federal Reserve Chairman Kevin Warsh signaled a firm commitment to fighting inflation, lifting market expectations for a central bank interest rate hike. Bullion traded around $4,450 an ounce following the sharpest decline since early June in the previous session. Spot gold was down 2.9% at $4,567.23 per ounce by 01:44 p.m. EDT (The Economic Times).
Gold Steadies Following Steep Friday Drop on Rising Rate-Hike Bets
Warsh reiterated at the Fed’s annual conference in Jackson Hole, Wyoming, that policymakers will return inflation to their 2% goal, which he described as a firm and fixed target. In his first speech since becoming Fed chairman in May, Warsh stated that the central bank has “work to do” if policymakers are not confident that underlying inflation is returning to its target (The Economic Times, Businessworld). Ole Hansen, head of commodity strategy at Saxo Bank, described Warsh’s speech as hawkish, noting that the yield curve’s bear flattening indicated markets were responding positively to his inflation-fighting credentials.
Traders Adjust Rate Expectations as Dollar and Yields Climb
Following the remarks, traders increased bets on monetary tightening. According to the CME FedWatch tool, traders priced in a more than 50% chance of a rate hike at the Fed’s next meeting in September. The probability of a quarter-point rate increase at the September meeting rose to 58%, compared with 36% prior to the comments (The Economic Times). Traders also calculated an 89% chance of a December increase (The Economic Times).
Independent analyst Tai Wong noted that gold was getting hard hit as the Fed chair affirmed that inflation is not meaningfully slowing, which makes the market price the September meeting as a coin flip (The Economic Times). Because gold offers no yield, it tends to lose appeal in high interest rate environments (The Economic Times). The US dollar rose to a more than one-week high, making greenback-priced bullion more expensive for holders of other currencies (The Economic Times). Benchmark Treasury yields also advanced, with the 10-year yield rising 5.3 basis points to 4.725% and the two-year yield climbing 12 basis points to 4.352% (Business AM Live).
Strong August Gains Remain Supported by the Debasement Trade and Treasury Intervention
Despite the weekly decline, bullion remained up around 10% in August, heading for its biggest monthly gain since January. Prices had previously surged following the US Treasury’s surprise mid-month announcement to ramp up bond buybacks. This intervention revived the debasement trade, driven by concerns over rising sovereign debt—with US government debt having surpassed $40 trillion—and currency devaluation (Livemint, Business AM Live).
Nicky Shiels, head of research and metals strategy at MKS PAMP SA, described the dovish Treasury and hawkish Federal Reserve as being in a tug of war. Shiels noted that the debasement trade is likely to continue supporting gold into September as the US Treasury starts bond buybacks ahead of the Fed meeting. Additionally, bullion-backed exchange-traded funds tracked by Bloomberg added more than 28 tonnes in a single week—their largest weekly addition since January—while central bank purchases also provided ongoing support.
