Gold Rally Explodes: Weak Dollar, Fed Uncertainty Push Prices To 3-Month High

Gold prices climbed to their highest level in more than three months on Monday, supported by a weaker US dollar as investors turned their attention to upcoming US inflation data and a speech by Federal Reserve Chair Kevin Warsh later this week.

Spot gold rose 0.9% to $4,643.63 an ounce by 0644 GMT, its highest level since mid-May.

The precious metal gained more than 5% last week, extending its rebound from July lows. US gold futures also advanced, rising 0.4% to $4,699.10 an ounce.

Weaker Dollar Supports Gold

The dollar remained near multi-month lows, providing support to bullion priced in the US currency. A weaker dollar makes gold relatively cheaper for buyers holding other currencies, potentially boosting demand.

The move in gold also comes as investors assess concerns around US fiscal policy.

The US Treasury's plan to increase buybacks of longer-dated government bonds has renewed attention on the country's borrowing requirements and fiscal credibility.

ING strategists said in a note that gold's recent recovery has been supported by renewed investment demand and growing concerns over the US fiscal outlook.

According to the strategists, gold has climbed from around $4,000 an ounce in mid-July to roughly $4,600, returning to levels last seen in May.

US Inflation Data In Focus

The next major test for the rally will come from US inflation data and its implications for the Federal Reserve's interest-rate outlook.

According to the Financial Times, analysts expect the July headline Personal Consumption Expenditures (PCE) price index to rise 0.1% month-on-month and 3.6% year-on-year, based on forecasts compiled by London Stock Exchange Group. That would remain well above the Fed's 2% inflation target.

Annual core PCE, which excludes food and energy prices, is expected to remain at 3.3%.

The inflation measure itself could become more difficult to interpret. Financial Times reported that Warsh has described core PCE as a “sort of a rough swag as to what’s going on”. The index is also scheduled for an overhaul that could result in lower recent readings.

Markets will therefore closely examine the data for clues about the trajectory of US monetary policy.

Warsh Speech Could Set The Tone

Investors are also awaiting Warsh's speech at the Jackson Hole symposium later this week. His comments could provide fresh signals about the Fed's thinking on inflation, interest rates and the broader economic outlook.

For gold, the interest-rate outlook remains particularly important because changes in US yields and expectations for monetary policy can influence the appeal of the non-yielding asset.

Geopolitical Risks Add To Gold’s Appeal

Geopolitical tensions are providing another layer of support for safe-haven demand.

The United States has threatened Iran with what it called the “greatest financial offensive ever marshalled”, with Washington preparing sanctions targeting Iran's trade partners.

Oil prices slipped as investors booked profits ahead of the expected announcement.

The combination of geopolitical uncertainty, concerns over the US fiscal outlook, a softer dollar and expectations around monetary policy has helped gold extend its sharp rebound from July.

With spot prices now back above $4,600 an ounce, investors are watching whether the precious metal can sustain its rally as this week's US inflation data and Warsh's Jackson Hole speech provide fresh direction for markets.