The rally in gold in August did not appear suddenly as an isolated market move. As of the time of writing by CNBC-TV18, the price of gold has risen by approximately 11% this month, second only to the gain of about 13% in January. The core change driving this market action is a significant reduction in market expectations for a Federal Reserve interest rate hike in September.
Employment Data First Altered Rate Expectations
At the beginning of August, the market believed the probability of a Fed rate hike in September exceeded 70%. Subsequently, the released U.S. employment report was significantly weaker than expected, leading investors to question whether the economy could withstand further tightening. Consequently, the probability of a rate hike fell rapidly.
The impact of weaker employment on gold is not directly from risk aversion sentiment but is transmitted through interest rate expectations. The market perceives the Fed as having greater difficulty raising rates, leading to a decline in bond yields, which increases the attractiveness of gold relative to bonds.
Cooling Inflation Provided a Second Push for Gold
Subsequent data on consumer and producer prices showed that inflationary pressures, excluding energy influences, were lower than market concerns earlier. By the time of the report's publication, the probability of a September rate hike had dropped to about 32%. The simultaneous retreat of the U.S. dollar and Treasury yields further amplified gold's gains.
A weaker dollar reduces the cost of gold for overseas buyers, while falling yields decrease the opportunity cost of holding gold. The simultaneous appearance of these two transmission channels explains why gold prices were able to break through key levels continuously in a short period.
Oil Prices Can Be Both Positive and Negative for Gold
High oil prices and Middle East risks typically increase safe-haven demand and also strengthen stagflation trades, seemingly beneficial for gold. However, persistently rising oil prices can also push up overall inflation, forcing the Fed to reconsider rate hikes. If yields and the dollar rebound as a result, gold could face pressure instead.
This is also the most important contradiction for subsequent market trends: weakening economic data and cooling core inflation support the Fed's decision to hold steady, while energy prices and geopolitical risks could cause inflation to flare up again.
Gold's rally in August has a clear macroeconomic foundation, but the market has already traded to higher price levels based on "reduced rate hike probability." Going forward, data must continue to support a dovish policy for gold prices to stabilize after the breakout; if inflation unexpectedly rebounds or the Fed's stance turns hawkish, profit-taking at high levels could lead to a rapid sell-off. For investors, it is essential not to interpret rising oil prices solely as a positive for safe-haven assets, but also to observe concurrently whether they reignite expectations for rate hikes.
