Gold experienced its steepest decline since July, with prices falling as much as 2.9% to $4,567.23 per ounce, after Federal Reserve Chairman Kevin Warsh's remarks solidified expectations for a U.S. interest rate hike this year. In his inaugural speech as chairman, Warsh reaffirmed the Fed's commitment to its 2% inflation target, emphasizing that policymakers would take necessary action if underlying inflation didn't show meaningful improvement. This hawkish stance strengthened the dollar and pushed U.S. Treasury yields higher, making non-yielding gold less attractive to investors.
Following Warsh's comments, market participants adjusted their expectations for a September rate hike. The probability of a 25-basis-point increase at the September meeting, as tracked by the CME FedWatch tool, rose from approximately 35% to over 57%. Traders also increased their bets on a December rate hike to an 80% chance. This shift in sentiment reflects concerns that inflation, elevated oil prices, and weaker labor market data might necessitate a tighter monetary policy.
The decline wiped out a significant portion of gold's recent gains, pulling back from a more than three-month high of $4,696.18 reached earlier in the week. Despite the sharp fall, which resulted in a 2.9% weekly drop, gold still maintained a substantial monthly gain of about 10% for August. Analysts from institutions like Natixis, State Street, and UBS continue to hold a bullish outlook for gold, with targets of $5,000 per ounce in the coming months, and some even suggesting $10,000 as a long-term possibility, citing concerns about rising U.S. government debt and potential currency debasement.
