Key Highlights

  • Gold was little changed around USD 4,590 an ounce after posting its biggest one-day percentage decline in a week.
  • PCE Inflation rose 3.7 per cent year on year in July, slightly above expectations.
  • Markets price a 38 per cent chance of a September rate hike and above 70 per cent by December, per the CME FedWatch Tool.

Gold was little changed around USD 4,590 an ounce on Thursday after posting its largest one-day percentage decline in a week, with investors positioning ahead of Federal Reserve Chair Kevin Warsh’s address at the Jackson Hole symposium on Friday. The metal reached a more than three-month high earlier in the week, so the flat session follows both a rally and a sharp single-day pullback.

The rate-hike question

The direction of the Federal Reserve is the immediate driver. Data on Wednesday showed the personal consumption expenditures price index rose 3.7 per cent year on year in July, slightly above expectations. Markets now price a 38 per cent probability of a September rate hike, with the probability of a hike by December above 70 per cent, according to the CME FedWatch Tool.

That pricing is the part worth reading carefully. A 38 per cent September probability against above 70 per cent by December means the market is more confident that a hike is coming than about when it arrives. For a non-yielding asset such as gold, higher policy rates raise the Opportunity cost of holding it, so the hike expectation is a headwind. The metal trading near a three-month high against that pricing indicates other factors are offsetting it.

Debt and Debasement as the offset

The offsetting Factor identified in the market is concern over global Debt levels, which continues to support Demand for the metal. The recent rally has been attributed to renewed concern over dollar debasement following the United States Treasury’s decision to increase Buybacks of older, long-dated bonds.

The two drivers are working against each other in a way that explains the flat session. Higher expected policy rates argue for a lower gold price through the opportunity cost channel. Concern about the currency and the sovereign debt position argues for a higher one through the store-of-value channel. With PCE at 3.7 per cent, close to double the Federal Reserve’s long-run 2 per cent objective, both arguments have current evidence behind them.

What Friday changes

Warsh’s debut Jackson Hole speech is the reason positioning has stalled rather than resolved. Investors are looking for signals on the approach to bringing inflation back to target. A first Jackson Hole address from a new chair carries more information than a routine one, because the framework itself is less established. Until that framework is stated, the market has little basis to move away from the current level.

Gold therefore sits close to a three-month high with a specific catalyst dated for Friday, a 3.7 per cent inflation print already known, and rate-hike odds that are meaningful but not decisive for September.

This article is general information only and does not take into account any individual objectives, financial situation or needs. It is not a recommendation to buy, sell or hold any security. All details are as stated in the company announcement or third party research referenced and are subject to change. Past performance is not a reliable indicator of future performance. Investors should consider the appropriateness of any information having regard to their own circumstances and seek independent financial advice before making any financial decision.