Powell Probe Sparks Gold Surge: A Tactical Play on Policy Risk or a Temporary Flight?

The specific event is a criminal probe. The Department of Justice opened an investigation into Federal Reserve Chair Jerome Powell over his June testimony about a $2.5 billion renovation of the Fed's Washington headquarters. This probe is a remarkable escalation in President Trump's pressure campaign, with the inquiry reportedly approved by a Trump ally running the D.C. U.S. attorney's office. Powell called the action unprecedented, linking it directly to his refusal to cut interest rates as quickly as the president demanded.

The immediate market reaction was a clear flight to safety. On Monday, spot gold advanced 2% to hit over $4,600 an ounce for the first time, while silver rose about 5% to around $84 per ounce, both hitting fresh record highs. This surge happened against a backdrop of broader market weakness, with the Dow Jones Industrial Average falling 0.6%. The selloff in stocks, coupled with the sharp move in precious metals, frames the probe's impact as a dominant theme of policy risk and a potential threat to central bank independence.

Assessing the Policy Risk: How Directly Does This Threaten the Fed's Mandate?

The probe's framing is the critical question. Powell explicitly stated the investigation is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President. He called it a threat of criminal charges aimed at intimidating the Fed into policy compliance. This direct linkage between his rate decisions and the DOJ action is the core of the policy risk.

President Trump's long-running campaign provides the context. He has repeatedly threatened to fire Powell and has named a potential successor, even as he publicly questioned the Fed's independence. The investigation, focused on a $2.5 billion renovation project, creates a potential "cover" for political interference. Critics argue this is a pretext to pressure the central bank, as the probe's subject matter is unrelated to monetary policy.

The credibility of this threat hinges on the investigation's substance. The probe examines whether Powell lied to Congress about the scope of the project, not his rate decisions. If it proceeds on this basis, the immediate risk to the Fed's mandate may be lower. However, the political optics are severe. A Republican senator has stated the probe leaves no doubt about an administration push to end Fed independence. This undermines the central bank's credibility, which is its most vital asset.

The bottom line is that the probe creates a tangible risk of political interference, regardless of its stated focus. The administration has now used the DOJ to target the Fed chair over policy disagreements. This sets a dangerous precedent that could chill future Fed independence, even if this specific investigation is dismissed. The market's flight to gold reflects a fear that the Fed's ability to act as a neutral, evidence-based institution is now in question.

Valuation and Scenarios: What's Priced In for Gold and Silver?

The current price levels are extreme. Spot gold has already advanced 2% to hit over $4,600 an ounce for the first time, extending a blistering rally that has seen prices rise around 6% this year alone. This surge is part of a much longer trend, with gold having gained nearly 65% in 2025. Such a parabolic move makes the metal highly vulnerable to profit-taking and sharp reversals. The rally is now being driven by a potent mix of geopolitical shocks and this new, high-stakes policy risk, which has pushed the asset into uncharted territory.

The sustainability of this rally hinges on a few key scenarios. The most supportive path is a direct shift in Fed leadership or policy. As Morningstar's Jon Mills noted, the scenario where Powell's departure leads to a new Fed Chair more in favor of rate cuts is traditionally supportive for gold. Lower interest rates reduce the opportunity cost of holding non-yielding bullion. Recent U.S. data pointing to a cooling labor market has already amplified this effect. If the probe accelerates Powell's exit or forces a policy pivot, the gold rally could extend.

The counter-scenario is resolution without a leadership change. President Trump has denied involvement in the DOJ's investigation, and the probe's stated focus is on Powell's testimony about a $2.5 billion renovation, not his rate decisions. If the investigation is dismissed or resolved on procedural grounds, the immediate policy risk premium could deflate rapidly. The market's reaction to the probe's announcement was a flight to safety, but if the threat is seen as a political sideshow rather than a genuine institutional assault, that safe-haven demand could wane.

In practice, the setup is a classic event-driven trade. The rally is priced for the worst-case scenario-a weakened Fed and dovish policy. The risk is that the probe fizzles, leaving gold with a massive, unsustainably high valuation. The reward is that it accelerates a policy shift that would justify the move. For now, the metal's record highs reflect pure speculation on a political catalyst, not a fundamental re-rating of its intrinsic value.

Catalysts and Risks: What to Watch for the Next Move

The tactical setup now hinges on a few near-term catalysts. The probe's scope and timeline are the most immediate variables. Watch for any official clarification from the DOJ or the White House. President Trump has denied involvement in the decision, but the investigation's stated focus is on Powell's testimony about a $2.5 billion renovation, not his rate decisions. If the DOJ's probe narrows to procedural issues or is dismissed, the policy risk premium in gold and silver could deflate rapidly. Conversely, if the investigation expands or drags on, it will reinforce the narrative of political interference.

Powell's public statements will be a key barometer. His rare video message framed the probe as unprecedented and politically motivated. Any shift in his tone-whether a more conciliatory stance or renewed defiance-could signal a change in the Fed's posture. More broadly, monitor Fed communications for any subtle shift in policy signaling. The market is pricing in two rate cuts this year; the probe could accelerate that expectation if it fuels fears of a dovish policy pivot.

The next major Fed meeting and accompanying economic data will be critical. The central bank is widely expected to hold policy steady later this month. However, if the probe intensifies, it may pressure the Fed to act more aggressively to assert its independence or counteract perceived political interference. The upcoming economic calendar will test the strength of the dovish narrative. Data showing a further cooling in the labor market could amplify the case for rate cuts, supporting gold. Conversely, stronger-than-expected data might challenge the market's current pricing and create volatility in the precious metals complex.

For now, the watchlist is clear. The probe's resolution is the primary event. Then, monitor Powell's rhetoric and Fed communications for any policy tilt. Finally, the next Fed meeting and the economic data leading up to it will determine whether the market's expectation for rate cuts is being adjusted. The rally in gold and silver is priced for a political catalyst; the next moves will depend on whether that catalyst leads to a policy shift or simply fizzles.