Gold deepens losses to two-week low on US interest rate outlook

Gold prices declined in European trading on Monday, extending losses for a second consecutive session and hitting a two-week low after more hawkish comments from Federal Reserve Chair Kevin Warsh at Jackson Hole boosted expectations for a US interest rate hike in September.

Further losses in the precious metal are currently being limited by a weaker US dollar against a basket of global currencies, as investors await a series of important US labor market reports that will provide crucial clues about the future path of US monetary policy.

The Price

• Gold prices today: Gold fell 1.35% to $4,396.59 an ounce, the lowest level since August 19, from an opening level of $4,454.93, after recording a high of $4,472.14.

• At Friday’s settlement, gold prices lost 3.2%, their largest daily decline since June 10, following Kevin Warsh’s comments.

• Gold lost 3.25% last week, its first weekly decline in a month, amid rising US Treasury yields and a stronger dollar.

Monthly trading

• During August, which officially ends with today’s settlement, gold prices are currently up around 9%, on track for a second consecutive monthly gain and their strongest monthly performance since January.

• The monthly gain has been driven by the easing of military tensions between the United States and Iran, improved risk appetite in markets, fading concerns about liquidity shortages, and stronger physical demand for gold bullion.

US dollar

The Dollar Index fell 0.2% on Monday, retreating from a two-week high and reflecting weakness in the US currency against a basket of global currencies.

As is well known, a weaker US currency makes dollar-denominated gold bullion more attractive to buyers holding other currencies.

In addition to profit-taking, the US dollar is weakening as investors refrain from building further long positions while awaiting more decisive evidence this week about the path of US interest rates.

Kevin Warsh

Federal Reserve Chair Kevin Warsh said at the Jackson Hole symposium on Friday that the US central bank “will have a lot of work to do” if policymakers cannot gain sufficient confidence that inflation is moving quickly toward the 2% target.

Warsh added that the Federal Reserve’s 2% target for the Personal Consumption Expenditures Price Index is unwavering and that it is the Fed’s responsibility to deliver price stability.

US interest rates

• Following those comments, according to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its September meeting fell from 66% to 40%, while the probability of a 25-basis-point rate hike increased from 34% to 60%.

• The probability of the Federal Reserve leaving interest rates unchanged at its December meeting fell from 26% to 13%, while the probability of a 25-basis-point rate hike increased from 74% to 87%.

• A series of highly important US labor market reports will be released this week. US job openings for the end of July are due on Tuesday, followed by private-sector employment data for August on Wednesday, weekly jobless claims on Thursday, and the August employment report on Friday.

Gold outlook

We believe gold remains under pressure from the hawkish stance adopted by Kevin Warsh at Jackson Hole, which has increased expectations for a US interest rate hike in September.

It remains to be seen this week whether US labor market data will translate into an actual interest rate hike in September.

SPDR Fund

Gold holdings at the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell by around 4.28 metric tons on Friday to a total of 1,042.36 metric tons, the lowest level since August 20.