- Bullion was on a strong upward trend in August, peaking toward the end of the month.
- Escalating tensions in the Middle East have weighed on the yellow metal.
- Market participants are now pricing a 68% chance that the Fed will hike in September.
Gold prices collapsed on Tuesday as rising tensions in the Middle East ignited inflation worries, sending Treasury yields higher. At the same time, Fed rate hike expectations continued rising after Warsh’s hawkish comments on Friday. Market participants are now gearing up for the US nonfarm payrolls report, which will further shape the outlook for monetary policy.
Bullion was on a bullish run in August that peaked towards the end of the month. Earlier in the month, downbeat US economic data and the hopes for a peace deal between the US and Iran were the major catalysts. Rate hike expectations eased, and traders were expecting a pause during the Fed’s September meeting.
Spot gold (Source: Bloomberg)
However, all these expectations changed last week after the Jackson Hole symposium. Fed Chair Kevin Warsh delivered a hawkish speech that sent rate hike expectations higher. He noted that inflation remains hot and has to come down to the central bank’s 2% target. If not, the Fed would have a lot of work to do, meaning aggressive tightening. Treasury yields and the dollar soared after the speech, while gold collapsed.
However, policymakers are also monitoring economic data. The recent slowdown could mean less room to tighten monetary policy. If it continues, the Fed will have to ensure that inflation drops and the economy does not tip into a recession.
Furthermore, escalating tensions in the Middle East have weighed on the yellow metal. The US, after pausing for nearly a month, attacked Iran on Sunday, starting a new wave of fighting. The conflict worsened on Tuesday, sending oil prices higher. At the same time, inflation worries sent Treasury yields higher.
“We’re seeing some technical selling pressure… bond yields globally are at highs not seen in years. So that’s all working to pressure the gold market,” said Jim Wyckoff, a market analyst at American Gold Exchange.
“The path of least resistance right now is probably sideways or sideways to lower in the gold market over the near term. The same goes for silver,” Wyckoff added.
Market participants are now pricing a 68% chance that the Fed will hike in September. However, this might change when the US releases its crucial monthly employment figures on Friday.
