Gold's Hawkish Fed Crosscurrent: Why Rate Fears Are Outweighing Geopolitical Safe-Haven Demand

Gold falls 2.7% as Fed rate hike odds jump to 65%, overshadowing geopolitical tensions and central bank buying.

The gold market is wrestling with a paradox that has left traders on both sides of the trade scratching their heads. A US military strike in the Strait of Hormuz—historically a trigger for safe-haven buying—has done little to lift the metal, while a single hawkish speech from the Federal Reserve chair has knocked prices sharply lower. The disconnect underscores how thoroughly interest-rate expectations have come to dominate the precious metals complex.

Spot gold was last seen trading at $4,331.87 per ounce, down 2.7 percent on the day, after sliding as much as 2.9 percent to $4,325.25 earlier in the session. That marks a notable retreat from Tuesday's close of $4,452.18, with the sell-off gathering momentum in the wake of Kevin Warsh's weekend address at the Jackson Hole symposium.

The Jackson Hole Effect

Warsh, who now leads the Federal Reserve, used his platform to deliver an unambiguous message: inflation is not falling fast enough, and the central bank remains committed to returning price growth to its 2 percent target. With financial conditions currently described as anything but restrictive, his remarks were interpreted as a clear signal that policymakers are prepared to act.

The market wasted little time repricing. According to the CME FedWatch Tool, the implied probability of a September rate hike has jumped to roughly 65 percent, up from around 36 percent before the speech. That repricing—a swing of nearly 30 percentage points—has been the primary driver of gold's recent weakness, as higher rates diminish the appeal of the non-yielding metal relative to interest-bearing assets.

To be sure, the market still sees a hold as the base case for the September 15–16 FOMC meeting, with futures pricing roughly 69 percent odds of rates staying at 3.50 to 3.75 percent versus about 31 percent for a 25-basis-point increase. But the hawkish tail risk has clearly grown, and gold is feeling the heat.

A Geopolitical Shock That Fell Flat

The timing of the military escalation added another layer of complexity. US forces struck Iranian rocket launchers in the Strait of Hormuz on Monday—the first such attack in over a month. In a typical playbook, this would have sent gold surging as investors sought refuge from geopolitical uncertainty. Instead, oil prices absorbed the shock while gold headed lower.

The explanation lies in the inflationary channel. With Tehran reportedly launching retaliatory strikes against the United Arab Emirates and Jordan, energy prices have climbed, feeding concerns about imported inflation. For gold, that creates a perverse dynamic: normally a beneficiary of geopolitical turmoil, the metal now finds itself weighed down by the very crisis that should support it, as rising oil prices reinforce the case for tighter Fed policy.

Fresh inflation data has only reinforced that narrative. July's PCE reading came in at 3.7 percent, above expectations, with the core rate climbing to 3.3 percent. Both figures bolster Warsh's argument and give the Fed additional ammunition heading into next month's meeting.

The Central Bank Counterweight

Yet beneath the surface volatility lies a structural demand story that continues to defy the bearish narrative. Central banks remain voracious buyers, and their appetite shows no signs of waning. The World Gold Council reported second-quarter net purchases of 288.9 tonnes—a 62 percent jump year-over-year and the strongest second quarter in the organization's data history. That figure also represents more than five times the weak first-quarter total of 56.5 tonnes.

The People's Bank of China has been at the forefront of this accumulation drive. In July, the PBOC added 20 tonnes, its largest monthly increase since October 2023, marking the 21st consecutive month of purchases. China's year-to-date acquisitions now total 60 tonnes, pushing its reserves to a record 2,377.5 tonnes. Poland's central bank has also been active, expanding its holdings by 82 tonnes in 2026 to reach 632 tonnes.

A June survey by the World Gold Council underscores the persistence of this trend: 45 percent of the 74 central banks polled indicated plans for further gold purchases over the next year—the highest proportion since the survey began in 2018.

ETF Flows Tell a Similar Story

Institutional investors have been mirroring central bank behavior. Holdings in the SPDR Gold Shares ETF rose to 1,045.50 tonnes by August 26, a weekly increase of 10.84 tonnes, with net capital inflows of $1.97 billion. Globally, ETF inflows reached $11 billion, or 39 tonnes, through the end of July, according to the World Gold Council. Asia led the charge, followed by Europe, while North America saw net outflows.

This structural demand helps explain why gold still managed to post its strongest monthly gain since January in August—a 10 percent advance—despite the recent pullback. That rally was fueled in part by the US Treasury's announcement that it would double its liquidity-support buybacks of longer-dated government bonds, raising the maximum operation size from $2 billion to at least $4 billion starting September 9. The move sent bond yields lower and weakened the dollar, providing a tailwind for gold that was visible as recently as August 19.

A Market Torn Between Two Narratives

For now, the tug-of-war between short-term rate fears and long-term structural demand is keeping gold traders on edge. The immediate price action is being dictated by the interplay of Fed expectations and the oil price shock, while the central bank buying spree and ETF inflows provide a floor beneath the market.

The next major test comes on September 4, when the US jobs report is due. That data point could reshape rate expectations once again and, by extension, determine whether gold's current pullback deepens or proves to be a buying opportunity within a broader uptrend. Until the FOMC delivers its verdict on September 15–16, volatility looks set to remain the market's defining feature.