Gold extended its decline in the first trading session of September as fresh tensions in the Middle East reignited inflation concerns and strengthened expectations of a Federal Reserve rate hike later this month.
Spot gold fell as much as 2% to US$4,326 ($6,046) an ounce, its lowest level in two weeks. US gold futures also dropped 2.3% to below US$4,400 an ounce.
Bullion has been under pressure since Friday, when Federal Reserve Chair Kevin Warsh delivered a hawkish message at the Jackson Hole symposium, warning that the US central bank still has “work to do” to bring inflation back towards its target.
Warsh’s comments triggered a broader market sell-off, with the weakness in gold carrying into this week as hostilities between the US and Iran resumed.
Oil prices rose sharply on Monday, posting their biggest gain in three weeks, and extended the advance into Tuesday.
Higher energy costs have weighed on gold since the conflict began. The resulting inflationary pressure increases the likelihood of higher interest rates, which typically reduces the appeal of non-yielding assets such as bullion.
August rebound loses steam
Gold had staged a strong recovery in August, gaining around 10% during the month.
The rally accelerated after the US Treasury unexpectedly announced plans in mid-August to ramp up bond buybacks in an effort to contain long-term yields.
The intervention revived the so-called debasement trade, driven by concerns over rising sovereign debt and currency devaluation — a theme that helped fuel gold’s rally in 2025.
However, more than half of the August rebound has now been erased since Friday’s sell-off.
Renewed Middle East tensions have also contributed to a global bond sell-off, pushing yields back towards their highest levels since January 2025 and adding further pressure on gold.
“Bond yields around the world continue to rise following Kevin Warsh’s hawkish speech last Friday, thereby adding some downward pressure on gold prices,” Saxo Bank analyst Ole Hansen told Reuters.
Rate hike odds jump
Expectations for higher interest rates received another boost earlier this week after US President Donald Trump told reporters in the Oval Office that Warsh would “do what he has to do” on rates.
Traders are now pricing in a 66% probability of an interest rate hike later this month, according to the CME FedWatch Tool.
TD Securities analysts say gold’s recent rally may have come too early given persistent inflation concerns.
“The rally in gold was still too early due to lingering inflation concerns,” the analysts wrote in a note.
“We expect some easing in prices, but do not anticipate another rout toward US$4,000 an ounce, as the renewed dollar debasement theme provides plenty of support.”
Banks remain bullish on gold
Despite the near-term pressure from higher yields and expectations of tighter monetary policy, the longer-term outlook for gold remains supported by strong investment demand.
Gold-backed exchange-traded funds (ETFs) recorded inflows during August, while continued central bank purchases are also providing underlying support for bullion.
Those factors have kept several major banks bullish on gold despite the latest sell-off.
Goldman Sachs sees gold reaching US$4,900 an ounce by the end of the year, while RBC has set a similar target of US$4,929.
For now, however, gold faces a tug of war between persistent inflation and rising rate expectations on one side, and strong investment demand, central bank buying, and concerns over currency debasement on the other.
Write to Jackson Chen at Mining.com.au
Image: Gold Industry Group
