Gold prices extended their decline on Monday, reaching a near two-week low as investors digested hawkish signals from Federal Reserve Chair Kevin Warsh. Spot gold dropped 0.7% to $44,423.84 per troy ounce by 0204 GMT, its weakest since August 19. The metal had already fallen more than 3% on Friday following Warsh's comments at the Jackson Hole economic symposium.
Fed chair's hawkish signal shifts market expectations
Speaking at the Fed's annual gathering in Wyoming, Warsh said the central bank would “have work to do” if policymakers do not gain sufficient confidence that inflation is heading towards 2%. The remarks were seen as his most direct acknowledgment yet that rate hikes may be required to ease price pressures. Markets reacted swiftly: according to the CME FedWatch tool, the probability of a September rate increase jumped to 57%, up from 36% before the speech.
Tim Waterer, chief market analyst at KCM Trade, noted that gold is “still licking its wounds after the hawkish tone struck by Warsh at Jackson Hole”. He added that the market is still processing the shift in rate expectations, and that it remains to be seen whether the rhetoric will translate into an actual hike in September.
Gold's sensitivity to rising rates
Although gold is traditionally viewed as a hedge against inflation, it typically loses appeal in a rising interest rate environment because it does not yield any interest. Higher rates increase the opportunity cost of holding non-yielding assets like bullion, and can also strengthen the US dollar, which puts further pressure on dollar-denominated precious metals.
Upcoming data and geopolitical factors
A busy week of US labour market reports lies ahead, including job openings, the ADP employment report, weekly jobless claims and the closely watched nonfarm payrolls (NFP) data. Waterer said the NFP figures have the potential either to extend gold's post-Jackson Hole weakness or to provide a catalyst for a short-covering bounce.
On the geopolitical front, US forces struck two Iranian launchers on Iran's Larak Island on Sunday, according to a US official. The strikes, the first known American attacks on Iran since late July, pushed oil prices higher. Such events can sometimes boost safe-haven demand for gold, but the metal's price reaction was subdued amid the dominant rate-hike narrative.
Other precious metals decline
Precious metals across the board moved lower. Spot silver fell 0.5% to $66.01 per ounce, platinum declined 0.5% to $1,810.64, and palladium slipped 1.7% to $1,397.11. December gold futures on the COMEX closed 1.3% lower at $4,472.90 per ounce.
Key takeaways
- Spot gold fell 0.7% to $44,423.84 per ounce, its lowest since August 19.
- Fed Chair Kevin Warsh signalled that rate hikes may be needed, boosting September rate hike expectations to 57%.
- A series of US labour market reports this week, including nonfarm payrolls, could shape gold's near-term direction.
- Geopolitical tensions rose after US strikes on Iranian launchers, but the impact on gold was limited.
Common questions
Why did gold prices fall?
Gold fell after Federal Reserve Chair Kevin Warsh indicated that the Fed may need to raise interest rates further to contain inflation. Higher rates make gold less attractive because it does not pay interest, and they can strengthen the dollar.
What is the CME FedWatch tool?
The CME FedWatch tool uses prices of Fed funds futures to estimate the probability of future interest rate changes. It is widely followed by traders to gauge market expectations of monetary policy.
How do interest rates affect gold?
Rising interest rates increase the opportunity cost of holding gold, which yields no interest or dividends. They also tend to support the US dollar, which typically pushes dollar-denominated gold prices lower.
For the latest price movements, check the live gold price on GoldRate.info.