Gold Holds Biggest Drop in Over Two Months on Fed Rate-Hike Bets

Gold prices saw their largest decline in over two months on Friday, following hawkish comments from Federal Reserve Chair Kevin Warsh at the Jackson Hole Economic Policy Symposium. Warsh's remarks reinforced the Fed's commitment to price stability, leading traders to increase their expectations for a September interest-rate hike. The probability of a quarter-point rate increase at the Federal Open Market Committee's September meeting surged to over 57% from approximately 35% the previous day, according to the CME FedWatch tool.

The sell-off pushed spot gold down 3.2% to $4,456.20 an ounce, while U.S. gold futures declined 3.4% to $4,506.66. The precious metal briefly dipped below $4,600 per ounce during the session. This intensified selling pressure also led to profit-taking after gold had surged approximately 15% in August, putting it on track for its strongest monthly performance since January 1999. Despite Friday's sharp drop, gold remained up about 10% for August.

The hawkish sentiment from Warsh strengthened the U.S. dollar, which rose 0.5%, and pushed U.S. Treasury yields higher. The benchmark 10-year Treasury yield increased 5.3 basis points to 4.725%, and the policy-sensitive two-year yield climbed 12 basis points to 4.352%. These higher yields and a stronger dollar increased the opportunity cost of holding non-yielding gold, contributing to its decline. Analysts, including those from Natixis, State Street, and UBS, still see gold potentially reaching $5,000 an ounce in the coming months, with some suggesting $10,000 as a long-term possibility.

Jeffrey Roach, Chief Economist at LPL Financial, noted that Warsh's comments signal a new phase for monetary policy, with the Fed focusing more on real-time data and re-evaluating economic principles as artificial intelligence transforms production capabilities. Fawad Razaqzada, Market Analyst at Forex, suggested that significant declines in long-term U.S. Treasury yields could present buying opportunities for gold despite current overbought conditions and resistance levels between $4,655 and $4,700 per ounce. Traders will now monitor the August Jobs Report and other Fed officials' comments for further policy alignment.