NEW YORK — Gold fell near a two-week low Monday as investors increased bets that the Federal Reserve could raise interest rates as soon as September, pushing Treasury yields higher and reducing the appeal of the non-yielding metal.
Spot gold was down 0.3% at $4,439.31 an ounce in early trading, after touching its lowest level since Aug. 19. U.S. gold futures fell 0.9% to $4,489.50 an ounce. The declines followed a sharp selloff Friday, when spot gold dropped more than 3% after Federal Reserve Chair Kevin Warsh signaled that policymakers may need to tighten monetary policy further if inflation does not convincingly move toward the central bank’s 2% target.
The retreat illustrates the delicate balance facing bullion investors. Gold is often sought as a haven during inflation, war and market volatility. But it generally struggles when interest rates and bond yields rise, because the metal does not generate income in the way Treasury securities, money-market instruments and other yield-bearing assets do.
Markets now see roughly a 60% probability that the Fed will raise rates at its September meeting, according to CME FedWatch pricing cited by Reuters. That probability rose sharply after Warsh’s remarks at the Federal Reserve’s annual Jackson Hole economic symposium.
The higher-rate outlook helped lift short-term Treasury yields. The two-year U.S. Treasury yield stood around 4.34% after jumping nearly 12 basis points Friday, while markets also priced in a more restrictive policy path beyond September.
For gold, the message from the bond market was clear: investors are increasingly preparing for rates to remain higher for longer.
A hawkish Fed shifts the outlook
Warsh said Friday that the Fed would “have work to do” if officials could not gain confidence that inflation was returning to the 2% goal. While he did not explicitly commit to a September increase, his comments were viewed by markets as one of the clearest signals yet that additional tightening could be necessary.
The reaction was swift. Traders raised expectations for a near-term rate hike, Treasury yields climbed and the dollar strengthened against several major currencies. Those developments created a more difficult environment for gold.
A stronger dollar makes dollar-priced gold more expensive for buyers using other currencies. Higher yields increase the opportunity cost of holding bullion. Together, the two forces can prompt investors to take profits after a rally or shift capital toward bonds and cash-like instruments.
“Gold is still licking its wounds after the hawkish tone struck by Warsh at Jackson Hole,” Tim Waterer, chief market analyst at KCM Trade, told Reuters. He said renewed U.S. military action involving Iran had lifted oil prices, adding to inflation concerns and worsening the outlook for bullion through the interest-rate channel.
The reasoning is straightforward. Higher oil prices can raise transportation, manufacturing and consumer costs, potentially feeding into broader inflation. If investors believe inflation will remain elevated, they may conclude that the Fed has less room to cut rates — or more reason to raise them.
Gold can benefit from inflation fears in some circumstances, especially when investors doubt the ability of central banks to contain price pressures. But when monetary authorities are perceived as willing and able to respond with higher rates, the initial effect can be negative for bullion.
That appears to be the market’s current calculation.
Middle East tensions complicate the trade
Gold’s decline came despite renewed geopolitical tension in the Middle East, an environment that would normally be expected to support demand for safe-haven assets.
Fresh fighting between the United States and Iran pushed oil prices sharply higher Monday after U.S. forces struck Iranian rocket launchers on Larak Island near the Strait of Hormuz. Iran responded by attacking U.S. forces in Jordan and claimed to have struck a tanker in the strategic waterway.
Brent crude futures climbed 2.7% to $90.51 a barrel, while U.S. crude gained 2.6% to $85.57. Oil prices were up more than 2% in the gold market report, reflecting investor concern that escalation could disrupt energy supplies or shipping through the Strait of Hormuz.reuters+1
Ordinarily, military conflict and oil-supply risk can prompt investors to buy gold as insurance against uncertainty. The metal is widely viewed as a store of value during periods of political instability, currency weakness or financial stress.
But this time, the geopolitical story has fed directly into the inflation story.
If oil prices stay elevated, policymakers could face a tougher task in bringing inflation down. That could mean higher policy rates for longer, stronger yields and additional pressure on assets that do not offer regular income. In that sense, the conflict may be acting as a bearish force for gold in the short term even as it strengthens the metal’s broader safe-haven case.
“The U.S. military action in Iran has put upward pressure on oil prices, and this has added to gold’s woes from an inflation standpoint,” Waterer said.
The conflicting forces leave gold exposed to abrupt swings. An escalation that causes broad market fear, serious oil disruption or concern about financial stability could renew demand for bullion. But if higher oil prices mainly reinforce expectations of tighter U.S. monetary policy, gold could remain under pressure.
From rally to correction
Monday’s weakness follows a notable period of strength for bullion earlier in August.
Gold reached a more than three-month high last week, with spot prices touching levels not seen since mid-May. On Aug. 25, spot gold traded as high as $4,634.76 an ounce after investors responded to technical buying, a weaker dollar and the U.S. Treasury Department’s decision to expand liquidity-support buybacks for longer-dated government debt.
Gold-backed exchange-traded funds also recorded substantial inflows. The World Gold Council reported that such funds attracted 46.7 metric tons, worth approximately $6.4 billion, during the previous week — the largest weekly inflow in 10 months.
That demand demonstrated that investors had not abandoned the longer-term case for gold. Concerns over government debt, currency debasement, geopolitical instability and volatile financial markets continue to support strategic demand for the metal.
But the speed of the recent rally left prices vulnerable to profit-taking. When Warsh’s comments shifted the perceived path of Fed policy, traders moved quickly to reassess positions.
Spot gold lost 3.2% Friday and was down 0.6% at about $4,425 an ounce in broader market trading Monday, according to a Reuters global-markets report. The difference between intraday quotations reflects the rapid volatility that followed the policy shift, but both readings pointed to a market retreating from the highs reached earlier in the month.
The selloff also affected other precious metals. Silver fell 0.5% to $66.68 an ounce, platinum declined 0.7% to $1,807.37, and palladium slipped 1.1% to $1,405.75, Reuters reported.
Jobs data could set the next move
The market’s next major test will come from U.S. labor-market data due this week.
Investors are awaiting job openings figures, the ADP private-employment report, weekly jobless claims and Friday’s closely watched nonfarm payrolls report. The numbers will help shape expectations for whether the Fed sees inflation as the dominant risk or whether signs of economic weakness could argue against an immediate rate increase.
Analysts surveyed by Reuters expect U.S. employers to have added 58,000 jobs in August, following a surprise decline of 23,000 in July. The unemployment rate is expected to hold at 4.1%.
A strong jobs report could reinforce the case for a September rate increase by suggesting that the economy can withstand tighter policy. That outcome could lift Treasury yields further, strengthen the dollar and deepen gold’s decline.
A weaker-than-expected report could have the opposite effect. If the data show a cooling labor market, investors may scale back expectations for a September hike. Lower yields and a softer dollar could give gold room for a rebound.
Waterer said the nonfarm payrolls report could either extend the metal’s post-Jackson Hole weakness or serve as a catalyst for short-covering, where traders who bet against gold are forced to buy back positions as prices rise.
Consumer price data due Sept. 11 will provide another important indicator. A higher-than-expected inflation reading would likely strengthen the argument for further Fed tightening. A softer result could ease rate fears and improve sentiment toward bullion.
What higher rates mean for gold
Gold has no coupon, dividend or interest payment. Its value comes from its role as a physical store of wealth, a portfolio diversifier and a hedge against certain financial and geopolitical risks.
That makes it especially sensitive to what investors can earn elsewhere.
When short-term Treasury securities offer high yields, the opportunity cost of holding gold increases. An investor choosing bullion over government bonds gives up a potentially attractive stream of interest income. If the dollar is also strengthening, overseas investors face an additional hurdle because each ounce of gold becomes more expensive in local-currency terms.
This does not mean gold cannot rise when rates are high. The metal can gain if real yields fall, if inflation outpaces nominal rates, if confidence in financial institutions declines, or if geopolitical risk drives investors toward safe assets.
But the immediate reaction to a more hawkish Federal Reserve is typically negative, particularly after a strong price run.
That was evident Monday, when the prospect of higher U.S. rates outweighed the support normally provided by war risk and rising oil prices.
A volatile path ahead
The outlook for gold now rests on a contest between monetary policy and uncertainty.
On one side are higher Treasury yields, a firmer dollar and rising expectations that the Fed could tighten policy again. On the other are geopolitical risks, oil-market disruption, continuing ETF demand and the possibility that inflation or financial instability could eventually revive safe-haven buying.
For the moment, the rates story is in control.
Markets are treating Warsh’s comments as evidence that the Fed will not quickly declare victory over inflation. With a September meeting approaching and key U.S. employment and inflation data still ahead, bullion traders are likely to remain highly sensitive to every new signal from Washington.
Gold’s drop to its lowest level since Aug. 19 is therefore less a verdict on the metal’s long-term appeal than a reflection of a rapidly changing interest-rate calculus. If the economic data support the case for tighter policy, the pressure could continue. If the data weaken or geopolitical tensions escalate into a broader financial shock, gold could again find buyers looking for protection.