Warsh Sends a Strong Inflation-Fighting Message<\/strong><\/p>\n\n\n\nWarsh’s speech was interpreted as significantly more hawkish than some investors had expected.<\/p>\n\n\n\n
The Fed chairman said policymakers needed to be confident that underlying inflation was moving towards the central bank’s 2% objective at a sufficient pace. If that confidence is absent, he indicated that the Federal Reserve still has more work to do.<\/p>\n\n\n\n
He also described short-term interest rates as the Fed’s primary tool for achieving its economic objectives, while suggesting that unconventional policies should be used sparingly outside genuine crises.<\/p>\n\n\n\n
Higher Rate Expectations Pressure Gold<\/strong><\/p>\n\n\n\nGold does not generate interest or dividends, which makes it particularly sensitive to expectations surrounding interest rates.<\/p>\n\n\n\n
When investors expect interest rates to remain high or rise, the opportunity cost of holding gold increases. Higher Treasury yields can therefore make interest-bearing assets more attractive compared with the precious metal.<\/p>\n\n\n\n
Following Warsh’s remarks, US Treasury yields moved higher and expectations for a potential rate increase strengthened. The US dollar also gained, creating another source of pressure on gold because bullion is primarily priced in dollars.<\/p>\n\n\n\n
Markets Reconsider September Rate-Cut Expectations<\/strong><\/p>\n\n\n\nThe Federal Reserve has kept interest rates unchanged at its recent policy meetings, while investors have been closely watching economic data for clues about the next move.<\/p>\n\n\n\n
Warsh’s latest comments have complicated expectations surrounding the September meeting. Although economic indicators have shown signs of slowing, the Fed remains concerned that inflation has not moved decisively enough towards its 2% objective.<\/p>\n\n\n\n
Before Warsh’s speech, markets had reduced expectations of a rate increase after weaker economic indicators. His comments prompted investors to reassess that view.<\/p>\n\n\n\n
Gold Had Recently Been Near Record Levels<\/strong><\/p>\n\n\n\nThe latest decline comes after a strong run for gold.<\/p>\n\n\n\n
Spot gold had reached more than $4,696 an ounce<\/strong> earlier in the week, its highest level in more than three months. The subsequent fall therefore represents a sharp reversal from the recent rally.<\/p>\n\n\n\nDespite the decline, the broader investment case for gold has not disappeared. Gold-backed exchange-traded funds have continued to attract substantial inflows, while central banks have remained important buyers of the metal.<\/p>\n\n\n\n
According to the report, bullion-backed ETFs tracked by Bloomberg added more than 28 tonnes during the previous week, followed by another 20 tonnes during the current week.<\/p>\n\n\n\n
Is the Gold Rally Over?<\/strong><\/p>\n\n\n\nThe latest sell-off does not necessarily signal the end of gold’s longer-term upward trend.<\/p>\n\n\n\n
Gold continues to benefit from several structural factors, including central-bank buying, investor demand and geopolitical uncertainty. However, the market has become increasingly sensitive to US monetary policy after the precious metal’s powerful rally.<\/p>\n\n\n\n
The immediate direction of prices could therefore depend heavily on upcoming US inflation, employment and economic-growth data. Any evidence that inflation remains stubbornly high could keep pressure on gold, while signs of cooling inflation could revive expectations of easier monetary policy.<\/p>\n\n\n\n
Indian Gold Prices Also Face Pressure<\/strong><\/p>\n\n\n\nMovements in international gold prices typically influence domestic bullion markets, although Indian prices are also affected by the rupee-dollar exchange rate, import costs, taxes and local demand.<\/p>\n\n\n\n
The sharp international decline therefore creates the possibility of lower domestic gold prices, although the extent of any reduction in India will depend on currency movements and local market conditions.<\/p>\n\n\n\n
For consumers, the fall could provide some relief after gold prices had climbed to exceptionally high levels.<\/p>\n\n\n\n
Summary<\/strong><\/p>\n\n\n\nGold suffered its biggest drop since July after Federal Reserve Chairman Kevin Warsh delivered a hawkish message on inflation and reaffirmed the Fed\u2019s 2% target. Spot gold fell as much as 2%, while the dollar and Treasury yields strengthened. Higher interest-rate expectations pressured the non-yielding metal, although strong ETF inflows and central-bank demand continue to support gold\u2019s broader outlook.<\/p>\n","protected":false},"excerpt":{"rendered":"
Gold Falls Sharply After Warsh\u2019s Speech Gold prices suffered their biggest single-day decline since July after US Federal Reserve Chairman Kevin Warsh reaffirmed the central bank’s determination to bring inflation back to its 2% target. Spot gold fell as much as 2% to around $4,485.76 an ounce, while silver dropped about 3.5%. The decline came […]<\/p>\n","protected":false},"author":30,"featured_media":1313384,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[669],"class_list":["post-1313378","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","tag-gold"],"acf":[],"yoast_head":"\n
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