On Tuesday (August 25), spot gold prices rose and then fell during the European session, currently trading below $4,650 per ounce, having retreated from around $4,700 (its highest level since May 14) during the day. Despite moderate US inflation data for July, inflation risks stemming from oil price volatility have led the market to still price in a roughly 75% probability of an interest rate hike before the end of the year. Escalating tensions between the US and Iran—US Treasury Secretary Bessenter announcing actions to sever Iran's ties with the global economy, and Iran warning of halting Gulf oil exports if the economic war continues—provided safe-haven buying for the US dollar, and gold faced profit-taking after hitting multi-month highs. The brief boost from US Treasury repurchase agreements has been offset by concerns that US Treasury debt will surpass $40 trillion, and the resurgence of "currency devaluation trades" may continue to support demand for gold as an alternative store of value.

Geopolitical and inflation risks supported the US dollar, while gold retreated from multi-month highs.

Spot gold is currently trading below $4,650 per ounce, having retreated from around $4,700 (its highest level since May 14) during the day. US Treasury Secretary Bessenter announced on Monday the initiation of actions to sever Iran's economic ties with the global economy, warning any country doing business with Iran of the risk of US sanctions. Iran's security chief warned that if the economic war continues, oil exports from the Strait of Hormuz and the entire Persian Gulf will be halted. The persistent geopolitical risk premium is providing safe-haven buying support for the US dollar. Furthermore, inflationary risks stemming from oil price volatility have led the market to still price in a roughly 75% probability of an interest rate hike before the end of the year, further supporting the dollar and prompting profit-taking in gold after it hit multi-month highs.

The effect of US Treasury repurchase agreements is short-lived; currency depreciation supports gold trading.

The initial downward push on US Treasury yields from the Treasury's expanded repurchase program was short-lived. Renewed concerns about the US Treasury bill exceeding $40 trillion fueled a resurgence of the "currency devaluation trade." This could continue to support demand for gold as an alternative store of value. Cooling expectations of a September rate hike by the Federal Reserve have made traders reluctant to make aggressive bullish bets on the dollar, instead awaiting further clues about the policy path.

This week's focus: PCE data and Jackson Hole speech

Market focus is shifting to Wednesday's US PCE price index and Friday's speech by Federal Reserve Chairman Warsh in Jackson Hole. These events will provide further clues about the Fed's policy path and determine the short-term direction of the dollar, providing new impetus for gold prices. Before that, strong follow-through selling is needed to confirm that gold has peaked and is poised for further depreciation.

Summarize

Spot gold traded below $4,650 per ounce, retreating from its highest level since May 14th near $4,700. Escalating tensions between the US and Iran—with the US initiating actions to sever Iran's economic ties with the global economy and Iran threatening to halt Gulf oil exports—provided safe-haven buying of the dollar, prompting profit-taking in gold. The market is still pricing in a roughly 75% probability of an interest rate hike before the end of the year. The short-lived effect of US Treasury buybacks and concerns that the US national debt would surpass $40 trillion revived the "currency devaluation trade," supporting gold demand. The market is focused on Wednesday's PCE data and Friday's Jackson Hole speech for clues about the Fed's policy path. (Spot gold daily chart, source: FX678) At 15:24 Beijing time on August 25, spot gold was trading at $4640.63 per ounce.