Fed and Treasury at Odds, Gold Caught in Policy Crossfire

Odaily News: Gold extended its decline on the last trading day of August. In the previous trading session, international spot gold plunged more than 3%, marking its biggest single-day drop since June 10; on Monday, it briefly fell below $4,400 per ounce during trading before paring losses. On the surface, this correction stems from hawkish signals from Federal Reserve Chairman Kevin Warsh, but the deeper shift is that the "dollar depreciation" expectations that had been driving gold higher are now facing a counterattack from higher interest rates and higher Treasury yields.

Clearly, gold is currently facing an unfavorable combination: rising oil prices are pushing up inflation, making the Fed more likely to maintain high rates or even hike, while rising bond yields further weaken gold's appeal. Market observers believe that the U.S.'s massive fiscal deficit, expanding government debt, and the Treasury's intervention in the bond market will provide long-term support for gold. As long as investors continue to worry about long-term debt and the purchasing power of currency, this "devaluation trade" is unlikely to completely disappear.