Federal Reserve Chairman Kevin Warsh's hawkish speech in Jackson Hole, Wyoming, on Friday (August 28) reiterated the central bank's commitment to keeping inflation under control. Bart Melek, head of commodities research at TD Securities, said this stance could be a significant headwind for gold in the short term.

Warsh's Hawkish Manifesto: Inflation Unresolved, Financial Conditions Not Tight

In his latest gold analysis, Melek wrote, "Federal Reserve Chairman Kevin Warsh warned in his Jackson Hole speech last Friday that inflation has not yet convincingly slowed, noting that policymakers need to ensure inflation returns to the 2% target level, which he said is firm and fixed. He also stated that current financial conditions are not restrictive." Melek also noted that Warsh claimed "the data is not conducive to taming high PCE and CPI inflation indicators," meaning that rising energy prices and a still-strong economy imply that the fundamental drivers of overall price increases remain.

Market repricing: Interest rate hikes may follow in September and December.

Melek stated, "The market interpreted this speech as indicating that the Federal Reserve is more likely to pull the trigger on interest rate hikes in September and December, a significant shift from expectations before Warsh's speech. The resulting higher short-term interest rates and a stronger dollar pushed gold prices down by approximately $125 to $4,470 per ounce at the time of writing. This aligns with our assumptions over the past few weeks." He added that TD Securities believes gold may have further downside potential in the near term, even if the dollar remains under pressure. He wrote, "We judge that the Fed's firm reaffirmation of its commitment to price stability and its belief that monetary policy remains the most effective tool for achieving this goal means the devaluation narrative will be temporarily shelved by the market. Previously, traders pushed up gold prices due to the Treasury's intervention in the long end of the bond market, leading to easing financial conditions. Therefore, the precious metal is likely to give back some of its recent gains, falling towards the lower end of its recent $4,200 to $4,700 per ounce trading range by the end of the year. Higher interest rates at the front end of the yield curve should offset the improved financial conditions resulting from the Treasury's liquidity operations at the long end."

More hawkish than in July, but gold prices still have a logic for a turnaround in the medium term.

Melek stated that the Federal Reserve Chair appears slightly more hawkish than in July. He noted, "The economy is performing relatively well, and inflation remains above target. The market is now pricing in increases in the federal funds rate in both September and December. However, once inflation stabilizes against a backdrop of a more balanced oil market and weakening aggregate demand due to higher interest rates, the Fed should have greater confidence in easing any tightening to fulfill its maximum employment mandate, which would support gold prices toward our target of $5,350 per ounce for the third quarter of 2027." He added, "Central banks, institutional investors, and physical retail investors are likely to act as catalysts as they continue to view precious metals as an attractive portfolio diversification tool and may be looking for better entry points."

Conclusion

From the Treasury's easing stance to the Fed's hawkish stance, the narrative driving gold is undergoing a sharp turn. TD Securities' assessment is clear: in the short term, Warsh's position outweighs the devaluation trade, and gold prices may seek a bottom at the lower end of the $4,200 range; in the medium term, once inflation stabilizes and the Fed resumes its employment responsibilities, gold still has the potential to return to the $5,350 target. Spot gold daily chart source: FX678. At 11:13 AM Beijing time on September 1st, spot gold was trading at $4439.20 per ounce.