Gold prices steadied on Monday, trading near $4,450 an ounce, after suffering their biggest single-day drop in more than two months on Friday. The sell-off was driven by rekindled expectations that the US Federal Reserve will raise interest rates at its September meeting, following hawkish signals from Chairman Kevin Warsh. Meanwhile, a fresh spike in oil prices after US military action against Iran added another layer of inflationary pressure to the outlook.
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Fed rate hike expectations weigh on gold
Speaking at the Kansas City Fed’s annual Jackson Hole symposium, Warsh reiterated that the central bank aims to return inflation to a 2% target, describing it as a “firm and fixed” goal. His remarks prompted traders to reassess the likelihood of a rate increase, with markets now pricing in a more than 50% chance of a hike at the Federal Reserve’s next policy meeting in September. Higher interest rates tend to weigh on gold by increasing the opportunity cost of holding a non-yielding asset.
Friday’s decline of more than 3% was the steepest since early June. The metal had been rallying strongly for much of August, climbing roughly 10% over the month — on track for its biggest monthly gain since January — before the sell-off erased a portion of those gains.
Oil prices rise after US military action
Adding to the inflationary backdrop, oil prices jumped after the US military struck Iranian rocket launchers that it said were preparing to deploy mines in a key waterway. The action was the first direct American military engagement with Iran in more than a month, following a shift in strategy by President Donald Trump toward economic pressure. Higher energy costs can feed into broader inflation, reinforcing the case for tighter monetary policy and adding another headwind for gold in the near term.
Gold’s monthly gains and the debasement trade
Despite Friday’s setback, gold remains firmly in positive territory for August and is coming off a remarkable 2025 that saw prices surge 65%. That broader rally was fuelled by the so-called debasement trade — buying assets like gold as a hedge against currency devaluation and rising sovereign debt. The trade regained momentum in mid-August after the US Treasury unexpectedly announced plans to ramp up bond buybacks, a move intended to rein in borrowing costs.
The current market dynamic pits a hawkish Federal Reserve against a dovish Treasury. Nicky Shiels, head of research and metals strategy at MKS PAMP SA, described the situation as a “tug of war” in a note. She added that the debasement trade is likely to continue into September, supported by the start of Treasury bond buybacks and the uncertainty surrounding the Fed’s rate decision.
In other precious metals, silver edged 0.1% lower to $66.29 an ounce, platinum was little changed, and palladium fell 2%. The Bloomberg Dollar Spot Index was marginally lower after rising 0.4% the previous session.
Key takeaways
- Gold steadied near $4,450 an ounce after a 3% drop on Friday, its steepest since early June.
- Fed Chair Kevin Warsh reaffirmed the 2% inflation target, leading traders to price in a greater than 50% chance of a September rate hike.
- A jump in oil prices after US strikes on Iranian rocket launchers added inflationary pressure, reinforcing the case for tighter monetary policy.
- Despite the pullback, gold is up roughly 10% in August and the debasement trade, driven by Treasury bond buybacks, is expected to continue supporting prices into September.
Common questions
Why did gold fall sharply on Friday?
Gold dropped more than 3% after Federal Reserve Chair Kevin Warsh signalled a firm commitment to fighting inflation, increasing expectations that the Fed will raise interest rates at its September meeting. Higher rates make non-yielding assets like gold less attractive compared with yield-bearing alternatives.
What is the debasement trade?
The debasement trade refers to buying assets such as gold as protection against currency devaluation and rising sovereign debt. It gained momentum after the US Treasury announced plans to ramp up bond buybacks, reviving concerns about the long-term value of fiat currencies. This trade was a major driver of gold’s 65% rally in 2025.
Gold prices remain sensitive to the tug of war between the Treasury’s easing measures and the Fed’s tightening stance. The next major catalyst will be the Fed’s September meeting, where a rate decision could set the tone for the metal’s near-term direction.