Markets Reprice the Fed, Precious Metals Pay the Price

Precious metals came under significant pressure following Federal Reserve Chair Kevin Warsh's closely watched Jackson Hole debut on Friday. Warsh reaffirmed the Fed's commitment to its long standing 2% inflation target, warning that recent inflation data had not demonstrated "meaningful improvement" and that policymakers still have “work to do” if inflation remains elevated(Federal Reserve).  

Markets interpreted the remarks as distinctly hawkish, triggering a rise in Treasury yields, a stronger US dollar and a sharp repricing of rate hike expectations.  

Precious Metals Performance 

• Gold: Fell 4% from its highs on Friday, briefly dropping below USD $4,550oz before closing below its 200-daily moving average at USD $4,452oz.  

• Silver: Declined around 7% from its highs of USD $71oz, closing at USD $66.3, underperforming gold.  

• Platinum: More resilient, though still traded 1.5% lower, closing at USD $1,821oz.  

Key Drivers 

• Markets now assign materially higher odds of a September, October or December rate increase (57%, 71% and 89% respectively). Supporting both the US dollar (US dollar index or DXY +0.7% week-on-week) and Treasury yields (US 10-year real yield +8bp). For non-yielding assets such as precious metals, higher real rates remain a significant near-term headwind. 

• Crude oil remained firm as markets continue to assess Middle East developments and their implications for inflation and global growth (Crude Oil WTI futures +1.7% to ~USD $84.8/bbl).  

While Warsh's comments have created a near-term headwind for precious metals, the broader structural bull market for precious metals remains intact. Ongoing central bank purchases, resilient ETF inflows and ongoing concerns surrounding fiscal sustainability continue to provide underlying support. Friday's Non-Farm Payrolls data will be a key to watch, offering further insight into the likelihood of a hawkish policy move by the Fed at its September meeting. 

Luke Tyler
Senior Analyst, ABC Bullion

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