Gold slipped on Monday as renewed conflict in the Middle East pushed oil prices higher and revived worries about inflation, prompting traders to increase bets that the Federal Reserve will raise interest rates in September. The move came despite a separate source of support for bullion from the US Treasury's expanded bond buyback programme.
Oil surge and rate expectations
Spot gold fell 0.5% to $4,434.78 an ounce by early afternoon in New York. The decline coincided with US crude climbing above $85 a barrel after the United States and Iran exchanged strikes for the first time in about a month. President Donald Trump said Washington would respond to Iranian attacks on US forces.
Higher energy costs tend to feed through into broader price pressures, raising the chance that the Fed will tighten policy further. Markets are now pricing in a more than 60% probability of a rate increase at the September meeting, after Fed Chairman Kevin Warsh reiterated his commitment to fighting inflation.
Rising Treasury yields, themselves a product of both the oil shock and rate expectations, added to the headwind for gold, which pays no interest and becomes less attractive when bond returns climb.
Treasury buybacks offer a counterweight
Offsetting some of the downward pressure is the US Treasury's plan to ramp up bond buybacks. The programme, which involves the government purchasing its own debt from the open market, has revived what some analysts call the 'debasement trade' — the idea that central bank and treasury operations will eventually weaken the purchasing power of currencies, supporting hard assets like gold.
Gold remains up roughly 10% in August and is heading for its biggest monthly gain since January, largely on the back of this trend.
Nicky Shiels, head of research and metals strategy at MKS PAMP SA, described the current dynamic as a “tug of war” between the Treasury and the Fed. In a note, she said she expects the debasement trade to continue supporting gold into September.
Silver slipped 0.1% to $66.30 an ounce on Monday, while platinum and palladium also declined.
Key takeaways
- Gold fell 0.5% as US crude rose above $85 on renewed Middle East tensions.
- Traders now see a more than 60% chance of a Fed rate hike in September after Chairman Kevin Warsh vowed to fight inflation.
- The US Treasury's bond buyback programme has bolstered the debasement trade, keeping gold on track for its best monthly gain since January.
- Analysts at MKS PAMP expect the support from debasement concerns to persist into next month.
Common questions
Why did gold fall despite support from Treasury buybacks?
The negative impact of rising oil prices, higher Treasury yields, and increased bets on a September Fed rate hike outweighed the positive effect of the Treasury's bond buyback programme on Monday. The buybacks have been a broader trend supporting gold in August, but short-term rate expectations dominated the session.
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The tug of war between monetary tightening and fiscal support is likely to keep gold volatile in the weeks ahead, with the September rate decision acting as a key catalyst.