Will Gold be able to recover?

The US dollar ended August with its second consecutive close in the red. Despite a successful end to the summer thanks to Kevin Warsh’s ‘hawkish’ rhetoric at Jackson Hole, the USD index fell over the month due to the Treasury’s intention to lower long-term Treasury yields, slowing inflation, a cooling labour market and a reduced likelihood of the Fed tightening monetary policy.

At the turn of August and September, the probability of a federal funds rate hike at the next FOMC meeting jumped above 60%. This allowed the USD index to partially recoup its losses. Rumours are circulating in the market that Kevin Warsh, with his speech at Jackson Hole, not only corrected the communication errors of his previous remarks but also restored confidence. His departure, coupled with the Treasury’s intention to control Treasury yields, laid the groundwork for a ‘debasement trade’.

As a result, gold capitalised on the decline in investor interest in bonds and currencies and soared by almost 10% in August. This marks the best performance since January, despite a loss of more than 3% due to Kevin Warsh’s ‘hawkish’ speech and the escalation of the conflict in the Middle East. The resumption of hostilities between the US and Iran pushed Brent crude above $90 per barrel, increasing the risks of accelerating inflation and a tightening of the Fed’s monetary policy.

And yet, the main factor behind a potential correction in XAUUSD could be a return of confidence in the Fed Chair. According to Donald Trump, Kevin Warsh will ultimately do what he is supposed to do. Scott Bessent argues that the Treasury and the central bank are working in tandem and puts forward a case for keeping rates unchanged at the next FOMC meeting.

 Wells Fargo believes the US dollar will weaken by the end of September as the Fed disappoints markets. The central bank will not tighten monetary policy. This would lead to a continuation of the upward trend in gold prices.

The precious metal is under pressure as global debt market yields return to their highest levels since 2008. Yields on 10-year Treasury bonds are at 19-year highs. It is believed that gold, which does not pay interest, cannot compete with Treasuries when rates are rising.

Summary: Gold surged nearly 10% in August, its best monthly performance since January, but faces headwinds from rising Treasury yields at 19-year highs and a dollar recovering on renewed Fed hawkishness. The fate of XAUUSD now hinges on whether the Fed follows through on rate hike expectations or disappoints markets in September.