Institution: Hawkish statement from the Fed temporarily halts depreciation trades, gold price may reach $4,200 by year-end

Federal Reserve Chair Kevin Warsh delivered a hawkish speech last Friday (August 28) in Jackson Hole, Wyoming, reiterating the central bank’s commitment to bringing inflation under control. Bart Melek, Head of Commodity Research at TD Securities, stated that this stance could create significant headwinds for gold in the short term.

Warsh’s hawkish declaration: inflation not yet subdued, financial conditions not tight

Melek wrote in his latest gold analysis: “Federal Reserve Chair Kevin Warsh, during last Friday’s Jackson Hole speech, warned that inflation has not convincingly slowed down and pointed out that policymakers must ensure inflation returns to the 2% target level, adding that this target is firm and fixed. He also noted that current financial conditions are not restrictive.”

Melek also noted Warsh’s claim that “the data isn’t favorable to taming high PCE and CPI inflation indicators,” that is, rising energy prices and a still strong economy mean the underlying drivers pushing overall prices higher remain in place.

Market repricing: Possible consecutive rate hikes in September and December

Melek stated: “The market has interpreted this speech as making it more likely that the US central bank will pull the rate hike trigger in both September and December, which marks a significant shift compared to expectations before Warsh’s remarks. The resulting higher short-term interest rates and a stronger dollar have pushed gold prices down by about $125, to $4,470 per ounce as of writing. This aligns with the assumptions we’ve held over the past few weeks.”

He stated that TD Securities believes that even though the dollar still faces pressure, gold may have further downside in the near term. “We judge that the Federal Reserve’s firm reiteration of its commitment to price stability, and the belief that monetary policy remains the most effective tool to achieve this target, means the depreciation trade narrative will be sidelined for now. Previously, traders pushed gold prices higher due to the Treasury’s intervention at the long end of the bond market, which loosened financial conditions. As a result, precious metals are likely to give back some recent gains, falling toward the lower end of the $4,200 to $4,700 per ounce trading range ahead of year-end. Higher rates at the front end of the curve should offset the improvement in financial conditions brought by the Treasury’s long-end liquidity operations.”

More hawkish than July, but a mid-term bullish case for gold remains

Melek said this Federal Reserve Chair seems somewhat more hawkish than in July. He pointed out: “The economy is performing relatively well, while inflation remains above target. The market is now pricing in federal funds rate hikes in both September and December. However, once inflation stabilizes amid a more balanced oil market and demand weakens due to high rates, the Fed should have more confidence to unwind any tightening and fulfill its maximum employment mandate, which will support gold prices as we aim for our $5,350 per ounce target for the third quarter of 2027.”

He added: “Central banks, institutions, and physical retail investors may act as catalysts, as they continue to view precious metals as an attractive diversification tool for their portfolios and may be looking for better entry points.”

Conclusion

From Treasury easing to a hawkish Federal Reserve, gold’s driving narrative is undergoing a sharp turn. TD Securities’ view is clear: in the short term, Warsh’s stance outweighs the depreciation trade, and gold prices may seek support near the lower end of the $4,200 area; in the medium term, once inflation stabilizes and the Fed returns to its employment mandate, gold still has the potential to rally back to the $5,350 target.

Editor: Zhu Henan