Gold Sinks $70 as Warsh Vows 2% PCE Inflation at Jackson Hole

The PRICE of GOLD swung violently on Friday, losing $70 inside 10 minutes as US Fed chairman Kevin Warsh shocked financial markets by denying any "forward guidance" on interest rates in his first speech at the Jackson Hole central banks' symposium while clearly hinting that he wants tighter monetary policy to curb inflation.

Having spooked financial markets in late-June by suggesting that the US central bank should change the inflation data it tracks, "There should be no misunderstanding," declared Warsh at Jackson Hole today.

"It is the Fed's job to deliver stable prices...[and] the Fed's price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target."

PCE inflation last month ran at 3.7% per year, new data said this week − more than 1.4 percentage points above the 'trimmed mean CPI' which Warsh was thought to favour.

So with the effective Fed Funds interest rate currently at 3.63%, that means PCE inflation has outrun the overnight cost of Dollars for 4 months running, the longest such stretch of negative real interest rates since New Year 2023 but something seen almost 60% of the time since 2000.

Over the prior 4 decades from 1960, Fed rates were negative after PCE inflation barely 10% of the time.

Rising to $4626 per troy ounce immediately before Warsh's speech was published on the Federal Reserve's website, gold prices sank as low as $4554 before fixing at London's 3pm benchmarking auction around $4560.

That flipped this week's previous 1.0% gain into a 0.4% loss, and it slashed August's near-record monthly gold jump of 15.8% to 13.3% in US Dollar terms.

The odds of a rate-rise at next month's Fed meeting meanwhile jumped from 1-in-3 to more than 2-in-5 as traders read and heard Warsh's speech, according to the CME derivatives exchange's FedWatch tool.

Year-end expectations also jumped, with the market consensus forecasting a Fed Funds rate of 3.94% after the central bank's December meeting, the highest in 3 weeks.

US equity markets ticked higher but silver fell alongside the gold price, dropping as much as $2 per ounce after hitting a new 10-week high above $71.

But while short-term rate expectations rose, longer-term bond yields edged further back after dropping from multi-decade highs on the US Treasury's shock 'buybacks' announcement mid-month.

That suggested that, with Warsh looking to curb inflation near-term, investors gained confidence in the longer-term value of the Dollar and Washington's bonds.

"Experience over the last few years suggests that the debt mountain concern – in the US and elsewhere – remains one of the pillars of gold demand," says Johan Palmberg, Senior Quantitative Analyst at the mining industry's World Gold Council.

"Any attempts to manage that burden not involving a reduction of debt or deficits are likely to continue favouring gold."

"The path higher [for gold prices is] likely to be grinding rather than explosive," reckons Manpreet Gill, chief investment officer for Africa, Middle East and Europe at $64 billion UK-based bank Standard Chartered.

"Rising long-maturity bond yields present a key obstacle. Nevertheless, we believe strong demand for gold from central banks supports maintaining it as a core holding in multi-asset portfolios."