Gold Price Surges on Weakening Dollar and Falling Rate Hike Expectations

The gold price has made a sharp rebound after falling earlier in the week. On Thursday, spot gold jumped over 2% and briefly moved back towards $4,500.

The catalyst for this change was Federal Reserve Governor Christopher Waller's comments that he could support keeping interest rates unchanged at the September meeting if inflation continues to moderate.

This shift in expectations has led to a decrease in the market-implied probability of a September rate hike from 63% to around 50%. As a result, gold prices have recovered as the opportunity cost of holding non-yielding assets like gold has decreased.

The relationship between Fed expectations, US Treasury yields, and the US dollar will remain crucial for traders throughout September. The current support factors for gold include falling rate hike expectations, decreasing Treasury yields, and a weakening US dollar.

However, the biggest complication for the gold outlook is energy inflation, with Brent crude remaining close to $95 per barrel on September 4. This creates a policy dilemma for the Federal Reserve, as weak labor markets could argue for lower interest rates, while higher energy prices could push inflation higher.