Will a September Hike Hurt Gold?

Key Points:

• Kevin Warsh's hawkish remarks at Jackson Hole increased market expectations for a 25 basis point rate hike in September, yet this shift may actually benefit gold and precious metals despite typical reactions.
• U.S. government policy is heavily influenced by the need to finance its large deficit at manageable interest rates, explaining Warsh's hawkish tone to prevent bond market sell-offs and maintain control over long-term yields.
• The Treasury and Federal Reserve are collaborating to cap long-term yields, effectively creating a new accord aimed at stabilizing financial conditions rather than tightening them in the traditional sense.
• A potential September rate hike is expected to anchor the 10-year Treasury yield, supporting loose financial conditions and continuing to favor the debasement trade, which benefits gold and similar assets.
• Historically, rising real 10-year Treasury yields (adjusted for inflation) increase the opportunity cost of holding gold, leading to lower gold prices, but current dynamics suggest this relationship may be shifting.