Gold rally explodes past $4,668 as dollar debasement fears return

Gold eased on Tuesday after briefly extending its rally to the highest level in more than three months, as investors shifted attention from US fiscal concerns to inflation data and Federal Reserve Chair Kevin Warsh’s first Jackson Hole address.

Spot gold slipped 0.2% to about $4,640 an ounce after trading above $4,668 earlier in the Asian session. US futures were little changed near $4,696.

The retreat follows a gain of more than 5% last week, when Treasury intervention in the bond market revived concerns over the dollar’s long-term purchasing power and sent investors back towards bullion.

Debasement trade is still doing the heavy lifting

Gold’s latest advance accelerated after the Treasury said it would at least double the maximum size of liquidity-support buybacks for 10- to 30-year securities, raising them from $2 billion to at least $4 billion per operation from September 9.

The decision revived the so-called debasement trade, in which investors favour scarce assets when they become concerned about government debt, currency weakness or policies designed to suppress borrowing costs.

The dollar index remained subdued near 98.96 on Tuesday, while the 10-year Treasury yield hovered around 4.70%.

TD Securities commodity analysts said fiscal concerns and potential further Treasury intervention should continue supporting gold through dollar weakness.

He nevertheless considers the firm’s $5,350 target premature because higher energy costs could revive inflation and force the Fed to tighten further.

PCE and Warsh will test the rate side of the trade

The next challenge arrives on Wednesday with July’s Personal Consumption Expenditures report.

June headline PCE inflation stood at 3.7% from a year earlier, while the core measure was 3.3%, both comfortably above the Fed’s 2% objective. The July report is due at 8:30 am ET on August 26.

Barclays economist Pooja Sriram expects core PCE to rise 0.2% from June, leaving the annual rate around 3.2%. A softer reading would strengthen the case for gold by reducing the risk of another near-term rate increase.

Warsh then takes centre stage at Jackson Hole on Friday. Markets will look for clues on how the Fed is balancing stubborn inflation against the recent jump in long-term yields.

Higher policy rates remain gold’s most obvious obstacle because bullion pays no interest.

Oil and Iran complicate the bullish case

Geopolitics provides support but also creates a monetary-policy problem.

Iran has threatened retaliation as Washington intensifies its economic-pressure campaign, keeping uncertainty around Middle East energy supplies elevated.

Oil prices have remained above pre-conflict levels even after Monday’s pullback.

MKS PAMP metals strategist Nicky Shiels, cited by Kitco, sees gold as one of the clearest hedges against currency debasement and political intervention.

She also cautions that high oil prices and tight refined-fuel markets could lift inflation expectations and keep pressure on the Fed to raise rates.

Silver fell to around $68.01 an ounce on Tuesday, while platinum slipped to $1,853.85 and palladium traded near $1,345.