Why gold is surging past $4,630 even as hotter inflation revives Fed hike risks

Gold climbed above $4,630 an ounce on Thursday as investors returned to the currency-debasement trade, with concerns over US debt and Treasury intervention continuing to outweigh the prospect of higher Federal Reserve interest rates.

Spot gold rose about 0.8% to $4,630.09 in Asian trading, while US futures gained 0.7% to $4,685.50.

Bullion remains close to the three-month high reached earlier this week after gaining more than 5% last week.

The latest advance comes despite hotter-than-expected US inflation, leaving Friday’s first Jackson Hole speech from Fed Chair Kevin Warsh as the next major test for the rally.

Debasement fears keep buyers interested

Gold’s August rally accelerated after the Treasury said it would at least double liquidity-support buybacks for longer-dated government bonds to $4 billion per operation from September 9.

The move is intended to improve market liquidity rather than permanently suppress yields, but it has intensified investor debate over US fiscal policy and the dollar’s purchasing power.

ANZ Research analysts told The Wall Street Journal that demand for gold continues to benefit from the dollar-debasement trade even as higher interest rates remain a potential constraint.

Gold rose another 0.5% to about $4,618 during Thursday’s Asian session in the bank’s latest assessment.

The concern is broader than one Treasury programme.

Investors are increasingly using bullion as protection against persistent deficits, rising government borrowing and uncertainty over how policymakers intend to manage elevated long-term yields.

Hotter PCE keeps the Fed problem alive

Wednesday’s inflation report complicated that bullish argument.

The PCE price index rose 0.2% in July and 3.7% from a year earlier, up from 3.6% in June and slightly above expectations.

Core PCE also increased 0.2% on the month and remained at 3.3% annually, showing little progress towards the Fed’s 2% goal.

Rate markets responded by increasing the probability of a September hike to about 44%, from roughly 36% before the report. Expectations for at least one increase by year-end strengthened further.

That matters because higher rates and real yields increase the opportunity cost of holding non-yielding gold.

Still, bullion’s resilience suggests investors are treating monetary policy as only one part of the story.

Fiscal concerns, geopolitical uncertainty and persistent central-bank demand continue to provide an unusually strong floor.

Warsh could put $5,000 back in focus

Attention now turns to Warsh, who delivers keynote remarks at the Jackson Hole symposium at 10 am ET on Friday.

Investors will be looking for clarity on how much inflation improvement the Fed needs before it can remain comfortably on hold.

State Street Investment Management’s Aakash Doshi told Kitco News that $5,000 gold by year-end is firmly back in play as concerns over sovereign debt return to global markets.

Gold has gained roughly 15% in August, putting it on course for its strongest month in decades.

A hawkish Warsh could push yields and the dollar higher, slowing that move. A balanced message that leaves September policy open, however, may allow fiscal concerns to remain the dominant driver.

Silver rose to around $69.28 an ounce on Thursday, while platinum and palladium also advanced.