Gold Surges 15% to Record High as Fed Independence Wanes

As the administration attempts to influence the Federal Reserve and the dollar to align with its policies, market expectations for the relative attractiveness of gold are heating up. Investors are viewing the administration's intervention in the Federal Reserve as a key driver for gold's rise, seeing it as a tool to hedge against currency weakness or policies intentionally designed to weaken the dollar.

Against a backdrop of waning confidence in dollar assets and escalating inflation risks, gold has emerged as one of the hottest assets of the year. This week, gold prices surged past 3500 dollars per ounce, setting a new historical high. Market consensus anticipates that the Federal Reserve will soon commence lowering interest rates, further bolstering the gold buying trend driven by robust purchases from central banks and deepening global economic concerns.

This surge in gold prices coincides with a series of tariff policies implemented by the administration, as well as unprecedented actions taken to influence Federal Reserve decisions. These measures have led to a weakening of the dollar and a decline in short-term U.S. Treasury yields, aligning with the administration's goal to stimulate corporate and consumer spending and reduce the burden of U.S. debt repayment.

Analysts point out that as the administration seeks to make the Federal Reserve and the dollar compliant with its wishes, market expectations for the sustained growth in gold's relative attractiveness are intensifying. Investors are viewing the administration's intervention in the Federal Reserve as the core logic behind gold's rise.

The independence of the Federal Reserve, a cornerstone of the U.S. economy and global financial markets, is now under threat. Investors increasingly believe that the administration's sustained pressure on the Federal Reserve's independence will provide new and powerful support for gold's record-breaking rally.

The administration has not only attempted to remove Federal Reserve Governor Jerome Powell but has also repeatedly criticized Chairman Jerome Powell and other decision-makers for not lowering interest rates quickly enough. Additionally, the administration is considering nominating a new chairman to create a potentially more compliant central bank.

Pangaea Wealth AG's chief executive officer stated, "Policy volatility has reached extreme levels, particularly from the White House. These policies, whether intentional or not, are weakening the dollar, which is beneficial for gold." Given decades of experience showing that when interest rates are set by an independent central bank, inflation remains low and economic growth is more stable, some investors are increasingly betting that the administration's "attack" on the Federal Reserve will steer the U.S. economy onto a darker path.

For investors bullish on gold, the most favorable scenario is one where the Federal Reserve is forced to lower interest rates amid rising inflation, leading to a sharp decline in the dollar. Currency devaluation and rising price pressures could quickly erode the returns on U.S. Treasuries, especially as the U.S. government prepares to increase borrowing. This would significantly enhance the appeal of alternative safe-haven assets like gold.

Pictet Asset Management's co-head of multi-asset in London stated, "The dollar will serve as a 'pressure valve' for the policies this administration wants to implement." He views gold as a tool to hedge against currency weakness or policies intentionally designed to weaken the dollar. This scenario played out in the 1970s when President Nixon pressured the Federal Reserve to maintain low interest rates in the face of inflation risks, leading to a significant devaluation of the dollar and a 300% surge in gold prices.

Currently, the overall sentiment in financial markets has not reached panic levels, but bets on interest rate cuts have significantly increased. As the Federal Reserve's September 16-17 meeting approaches, traders have ramped up their bets on a 25 basis point rate cut. This market reaction is directly reflected in bond yields. Short-term U.S. Treasury yields have recently fallen to a four-month low, known as the "front-end" rate decline, along with a weakening dollar, providing support for non-interest-bearing, dollar-denominated gold.

Meanwhile, 30-year U.S. Treasury yields remain stubbornly high, reflecting investors' bets that an early and aggressive rate-cutting cycle could stoke inflation, erode confidence in the central bank, and potentially trigger a massive outflow of funds from Treasuries into gold and other defensive investments.

DNCA Invest Strategic Resources Funds' portfolio manager stated, "Historically, dollar assets were safe havens, but they now appear increasingly unsafe. By default, gold looks like one of the last safe havens."

Currently, Wall Street is generally bullish on gold's future performance. UBS recently raised its gold price target, describing precious metals as "back at the peak"; Citigroup also upgraded its near-term outlook, partly due to the deteriorating U.S. economic conditions; Goldman Sachs is similarly bullish, citing strong central bank demand and diversification away from the dollar as key supports.

GAMA Asset Management SA's global macro portfolio manager predicts that gold prices could reach 4000 dollars by the end of 2026. "My view has undergone a significant shift, becoming more bullish on gold, primarily due to the loss of the Federal Reserve's independence." Despite gold prices being at high levels, investors seem to still have room to increase their holdings. According to data, investors' allocations to gold ETFs remain below the peaks seen during the 2020 pandemic and the 2022 Russia-Ukraine conflict. Additionally, data from the Commodity Futures Trading Commission shows that speculative long positions are also below historical highs. This indicates that if the trend of funds flowing from Treasuries to gold intensifies, the market still has enough space to accommodate more investors.

Pangaea Wealth's chief executive officer summarized, "As a value investor, U.S. government bonds look extremely poor. When you have a negative view on bonds, you need an alternative."