Gold Steadies After Sharp Sell-Off as Fed Rate Hike Bets Resurface

Gold prices stabilized in early trading on Monday, attempting to recover from a sharp sell-off at the end of last week. The precious metal fell 3.2% on Friday, its largest single-day drop since early June, after comments from Federal Reserve Chair Kevin Warsh signaled the central bank's fight against inflation is not over.

As of 20:53 ET (00:53 GMT), spot gold (XAU/USD) was up 0.2% to $4,464.65 an ounce, while gold futures for future delivery edged down 0.4% to $4,513.50.

Hawkish Fed Comments Rattle Markets

The recent pressure on gold stems directly from remarks by Fed Chair Warsh, who stated that the central bank still has work to do to bring inflation back down to its 2% target. This hawkish stance prompted traders to increase bets on another interest rate increase at the Fed's next meeting.

According to the CME FedWatch Tool, markets are now pricing in a roughly 57% probability of a rate hike in September. Higher interest rates typically act as a headwind for gold, as they increase the opportunity cost of holding the non-yielding asset compared to interest-bearing instruments like government bonds.

Fiscal Concerns Provide Underlying Support

Despite Friday's sharp decline, gold is still poised for a monthly gain of approximately 10%, its best performance since January. This resilience is largely attributed to underlying investor concerns about U.S. fiscal policy, a theme analysts at ANZ refer to as the "debasement trade."

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Earlier in August, a surprise move by the U.S. Treasury to increase its purchases of longer-dated government bonds revived worries about rising government debt and potential currency depreciation. These concerns have bolstered gold's appeal as a hedge against the declining purchasing power of fiat currencies. ANZ analysts noted that while the Fed's hawkish turn is a risk, they expect the downside for gold to be limited as these fiscal worries continue to attract buyers.

Market Outlook

Investors are now looking ahead to upcoming U.S. employment and inflation data for further clues on the Federal Reserve's policy path. Adding to the complex economic picture, rising oil prices, fueled by geopolitical tensions, are contributing to inflationary pressures.

Other precious metals saw mixed results:

• Spot silver (XAG/USD) gained 0.4% to $66.64 an ounce.
• Spot platinum (XPT/USD) advanced 0.7% to $1,835.35 an ounce.