Gold and silver prices are stabilizing after what appears to be a market overreaction on Friday to Federal Reserve Chairman Kevin Warsh's surprisingly hawkish message at the Fed’s annual Jackson Hole gathering.
Gold finished last week at $4,467 an ounce, down about 3.2% for the week and snapping a three-week winning streak. Silver declined roughly 3.8% to finish just over $67 an ounce. Much of those losses came Friday following Warsh’s remarks.
Warsh told markets this past Friday that the central bank needs to see convincing evidence that inflation is moving back toward its 2% target.
Investors took his comments as a warning that another interest rate hike could come as soon as September.
Markets are now putting the odds of a September rate hike at more than 50%. That sent shorter-term Treasury yields sharply higher and strengthened the U.S. dollar this past Friday – both traditional headwinds for precious metals.
But there is an interesting wrinkle in the recent weakness.
Investors have continued pouring substantial amounts of money into gold. Global gold-backed ETFs attracted more than $6 billion during the week ending August 21, adding nearly 47 metric tons of metal. North American investors accounted for the majority of those inflows.
And despite the sharp pullback at the end of last week, gold remains up roughly 10% during August and is on track for its strongest monthly gain since January.
Meanwhile, geopolitical tensions are once again competing with Fed policy for investors’ attention.
Oil prices jumped more than 3% Monday after renewed fighting between the United States and Iran near the Strait of Hormuz.
Brent crude moved back above $90 per barrel. A sustained increase in energy prices could add another layer of inflationary pressure – potentially complicating the Fed’s efforts to bring inflation under control.
That creates something of a tug-of-war for precious metals.
Higher interest rates and a stronger dollar can pressure gold and silver in the short run, while persistent inflation, geopolitical instability, and concerns over the longer-term fiscal picture continue to provide powerful reasons for investors to own tangible assets.
Attention now turns to Friday’s August employment report.
After July payrolls unexpectedly declined by 23,000 jobs, another weak report could quickly reduce expectations for a September rate hike and provide renewed support for gold and silver.
For now, the metals are giving back a portion of their impressive August gains – but the larger monetary, fiscal, and geopolitical forces that drove that rally haven’t gone away...
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