Gold has more to offer

The new Fed Chair wants the markets to do the central bank’s job for him. If the number of supporters of his position increases, the chances of a rate hike in 2026 will fall, weakening the greenback. Recently, the US dollar has retreated amid concerns that the July FOMC meeting minutes will show that Kevin Warsh’s approach is working.

His passivity is one of the drivers behind the rally in long-term Treasury yields to their highest levels since 2007. Other reasons include concerns about the budget deficit, rising inflation due to the conflict in the Middle East, and the diversion of funds towards artificial intelligence. To finance AI-related expenditures, companies are issuing bonds, diverting capital from the Treasury market and raising Treasury yields.

Surprisingly, rising interest rates on debt are not preventing gold from continuing its climb. Even though there are occasional slumps, such as the one seen on 18 August, which was the sharpest fall in nearly a month, investors believe that the rise in Treasury bond yields has more to do with selloffs driven by fears over the budget deficit than with hopes for the strength of the US economy. Indeed, the Congressional Budget Office forecasts that debt service costs will rise from an average of 2.1% of GDP over the past half-century to 3.3% in 2026 and 4.6% in 2036. Concerns about US financial stability are helping the metal to rise.

Additionally, according to a Bank of America survey, the proportion of investors who consider gold undervalued has risen to its highest level since March 2023.

Other currencies have capitalised on the weakness of the US dollar. The bulls failed to break through the resistance level at 159.5 on USDJPY, and the pair retreated. According to Mizuho Financial Group, the Bank of Japan will raise its overnight rate from 1% to 1.25% as early as September, and will then accelerate the cycle of monetary tightening, taking a new step every three months rather than every six. The main reason for this is that borrowing costs remain negative, whilst inflation stands at 1.6%.

The yen is also being supported by the fact that yields on Japanese government bonds are rising faster than those on US bonds. They have reached their highest level since 1996. This is contributing to capital repatriation and a fall in the USDJPY exchange rate. 

Summary: Gold gains as dollar weakness, fiscal worries and rising Japanese yields support the metal and the yen, while Fed and BoJ policy expectations steer markets.