Gold Rises to a Record, Then Falls Sharply. Why Investors Keep Buying

Gold investors did not get a quiet month in August. The metal began around $4,050 per troy ounce, climbed rapidly past $4,400 and exceeded $4,650 after Aug. 20. After Aug. 28, the decline accelerated, taking the price down toward $4,430.

Victor Dima, an expert on the gold market, described the month as far from calm for investors. He linked both the sharp rise and the late-month drop mainly to actions and statements from important U.S. financial authorities.

One factor behind the advance after Aug. 20 was the U.S. Treasury’s decision to increase purchases of long-term government securities with maturities of 10 to 30 years. According to Dima, the operations rose by more than 100%, adding at least $4 billion in liquidity with each operation. The move came as the yield on 30-year U.S. government bonds reached 5.34%, its highest level in 19 years.

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The vacation month proved far from quiet for investors in the gold market.

Interest rates and U.S. bond yields are closely watched in the gold market because gold does not generate interest. Expectations of higher rates can make it less attractive, while expectations of easier financial conditions or greater liquidity can support demand.

Sentiment shifted late in the month after investors focused on Federal Reserve Chair Kevin Warsh’s speech at the annual Jackson Hole symposium in Wyoming. It was Warsh’s first appearance there as the central bank’s new leader. Markets interpreted his message as tougher on inflation and interest rates. Warsh warned that the Federal Reserve “will have work to do” if Washington policymakers are not convinced that inflation is moving sustainably toward the 2% target. Investors took that as a signal that U.S. rates could stay higher, or rise further if inflation does not ease.

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will have work to do