Gold Holds Decline on Fed Rate Hike Bets

Gold traded around $4,460 an ounce on Monday after tumbling more than 3% in the previous session, as hawkish remarks from Federal Reserve Chair Kevin Warsh revived expectations for an imminent interest rate hike. In his Jackson Hole address on Friday, Warsh warned that inflation is not easing significantly and reaffirmed the central bank’s commitment to bringing inflation back to its 2% target, while noting that financial conditions are not currently restrictive. Markets are now pricing in around a 57% chance of a 25-basis-point Fed rate hike in September, up sharply from roughly 40% a week earlier. Gold also remained pressured by rising oil prices after the US military targeted Iranian rocket launchers preparing to deploy mines into the Strait of Hormuz, marking the first such attack in more than a month. Still, the metal is on track to gain over 10% for the August, driven in large part by the so-called debasement trade.

Gold prices fell toward $4,560 an ounce on Friday, their lowest level in a week, as investors digested what was perceived as hawkish commentary from Federal Reserve Chair Kevin Warsh. In his first major speech since becoming chair in May, Warsh warned that inflation is not meaningfully slowing and said policymakers need to be confident that underlying price pressures are easing; otherwise, the central bank still has “work to do.” He reiterated that the Fed remains committed to returning inflation to its 2% goal, which he described as a “firm and fixed” target, and said financial conditions are not currently restrictive. His closely watched remarks provided greater clarity on his economic and policy views after criticism that his more limited communication strategy had left markets with little guidance on the near-term outlook. Markets responded by raising the probability of a September rate hike to near 50%, according to CME FedWatch.

Gold steadied around $4,600 an ounce on Friday and was set to end the week little changed as investors cautiously awaited Federal Reserve Chair Kevin Warsh’s speech at the annual Jackson Hole symposium later in the day for clues about the outlook for US interest rates. Markets are currently pricing in around a 65% chance that the Fed will keep rates unchanged at its upcoming policy meeting in September. Still, a hotter-than-expected US inflation reading strengthened expectations for a Fed rate increase before year-end, with the probability of a hike by December remaining above 70%. Meanwhile, gold continued to benefit from the so-called debasement trade, as the US Treasury’s expanded debt buybacks heightened concerns over the risk of a US debt crisis and further dollar weakness. On the geopolitical front, oil prices remained elevated as escalations in the Russia-Ukraine war offset signs of diplomatic progress in the Middle East.