Gold steadies after sharp selloff as Warsh revives Fed hike bets

Gold prices rebounded on Monday after a sharp 3% drop the previous day, as investors reassessed the Federal Reserve's interest rate outlook following Chair Kevin Warsh's hawkish comments on inflation. Oil prices also rose, adding to concerns about the metal. Despite the recent decline, gold is up about 10% in August and poised for its strongest monthly gain since January.

At 20:53 ET, XAU/USD was trading at $4,464.65, while XAG/USD rose 0.4% to $66.64. The US Dollar Index dipped 0.1% to 99.60. Warsh's remarks sparked speculation of another rate increase, with markets now pricing a 57% chance of a September hike. This has eroded demand for gold, as interest-bearing assets like government bonds become more attractive when traders expect higher rates.

The dollar's strength also pressured gold, making it costlier for foreign buyers. ANZ analysts noted that the recent retreat was due to the increased expectations of rate hikes and reduced demand for the metal. However, they anticipate the downside to remain limited as the debasement trade, which involves buying gold amid concerns of weak currencies and rising debt, continues to attract investors.

Energy markets also contributed to the price swings, with Brent crude oil reaching around $89.38 and U.S. crude at $84.50. Tensions between Iran and the U.S. in the region added to the uncertainty, potentially keeping energy prices elevated. Gold's August rally gained momentum earlier this month following an unexpected increase in U.S. Treasury purchases of longer-dated government bonds, which lowered yields and pressured the dollar.

This renewed concerns about U.S. asset vulnerabilities, bolstering the debasement trade and driving gold's roughly 65% rally in 2025. ANZ sees the hawkish shift in monetary policy as a risk to the debasement demand but argues that fiscal and currency concerns, which underpin the trade, remain intact. Markets will closely monitor upcoming U.S. employment and inflation data to gauge whether the September hike case gains ground or weakens the hawkish positioning.