Warsh's AI-Boosted Hawkishness Sends Gold and Silver into Free Fall

Fed Chair Kevin Warsh cited the AI boom as justification for more rate hikes in his first Jackson Hole keynote, and gold and silver prices are paying the price. According to Warsh, 'we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,' which means the current numbers on inflation are more concerning. This led to a sharp decline in gold and silver prices, with gold falling 2.9% to $4,469.61 an ounce and silver dropping 3.7% to $66.74.

Warsh's comments also sparked a significant increase in rate-hike odds, jumping from around 35% to over 55%. The AI boom is seen as a positive sign for the economy, with business investment in equipment and intangibles growing at a near-9% pace, but this may not be enough to offset inflationary pressures. Warsh also emphasized that the Fed should not give forward guidance or an explicit reaction function, which could lead to market participants relying too heavily on the Fed's next move.

The Treasury's buyback program for older, long-dated bonds may also play a role in shaping interest rates and inflation expectations. The 2-year Treasury yield jumped to a one-month high after Warsh's speech, while the 30-year yield fell slightly. This divergence suggests that the market is repricing hike odds higher, but it's unclear what this means for gold and silver investors.