Photo by Dmitry Demidko on Unsplash
 

On Tuesday, the price of gold hit an all-time high of $3,650 per ounce. Year-to-date, gold is now outperforming digital gold – Bitcoin – at 37% vs 16% respectively. Nearly three weeks ago, we anticipated this scenario by covering gold mining stocks.

Specifically, since that coverage, Franco-Nevada (FNV) stock is up 7.5%, Barrick Mining (B) is up 13.5%, and Newmont (NEM) is up 7%. In all three cases, their current prices exceed their average price targets from less than a month ago. Year-to-date, the best-performing gold mining stock that we covered is Newmont (NEM), having gained 97% value.

We also acknowledged that the Federal Reserve is the primary driver of gold’s price, ahead of September’s likely interest rate cut. But is this trend likely to continue?

Mapping the U.S. Macro Landscape
 

By expending his political capital on tariffs, President Trump has made a risky move. After many decades of bipartisan consensus to make China the world’s manufacturing hub, massive dependencies were erected. Just in the realm of rare earth elements (REEs), China has strategic leverage that could cripple the US defense industry.

But even outside of China, domestic companies have built dependencies on raw materials and components as imports. Case in point, Mid Continent Nail Corp in Missouri had to cut 60 workers mid-June, with 200 more workers on the chopping block, after President Trump’s 25% tariffs on imported steel and 10% on aluminum.

Of course, these price hikes have to be passed on to consumers, as steel/aluminum contribute to pricing of a wide range of products, from cars and appliances to construction projects. In other words, both manufacturing and purchasing power, through inflation, is weakened simultaneously.

The latest non-farm payroll (NFP) report clearly shows this trend. Not only did the construction sector follow up with three consecutive months of payroll cuts, at 7,000 lost jobs in August, but the manufacturing sector lost 78,000 jobs year-over-year.

It is then easy to see why President Trump has a long-standing public feud with Fed Chair Jerome Powell, although he nominated him to that position in late 2017.

“Jerome “Too Late” Powell should have lowered rates long ago. As usual, he’s “Too Late!””

President Trump’s latest jab at Powell on Truth Social last Friday

Knowing that the transition to domestic manufacturing is going to be difficult, after such long-standing dependencies, Trump likely anticipated the current economic slump. From his postings, he appears to have counted on interest rate cuts much sooner.

Likewise, the firing of Fed Governor Lisa Cook in August is a clear signal that the window for waiting needs to be shut. On the other hand, tariffs themselves now appear to push inflation up, well-above the Fed’s target of 2% at 2.7% in July (up from the prior month’s 2.67%).

Officially, the purpose of the Federal Reserve is to keep price stability while promoting maximum employment. The first mandate is difficult to believe as the Fed itself created the massive inflation problem during 2020 by engaging in an unprecedented money supply increase.

And as the latest jobs data shows, the latter mandate is increasingly under strain. This puts the Fed in a bind:

Cutting rates too quickly risks another inflationary surge.

Holding rates higher for longer amplifies job losses and recessionary pressure.

In other words, these are hallmarks of stagflation, as we covered it in 2022. In early August, Bank of America Research analysts warned of such a scenario. The Fed can’t cut rates without fueling inflation, yet can’t keep them high without worsening unemployment, which is endangered due to domestic reshoring efforts via tariffs.

Is the Gold Rally Sustainable?
 

Previously, U.S. Treasury Secretary Scott Bessent suggested that a 50 bps interest rate cut would be appropriate for the FOMC meeting on September 17th. Although the CME FedWatch tool crashed at press time, it showed a near-90% probability for a 25 bps rate cut earlier in the day, with the 50 bps probability elevated to 10%.

For gold, the Fed’s bind acts as rocket fuel amid the convergence of two forces. From one angle, the 10-year Treasury yield is at its lowest level since early April, down to 4.07% from January’s high point of 4.8%. As the market expects a potential recession and imminent Fed rate cuts, gold is becoming more attractive as a safe-haven asset.

From another angle, if the Fed is prepared to follow through on rate cuts, despite inflation concerns, this means that the central bank is prepared to sacrifice its hawkish stance. Suffice it to say, that doesn’t boost confidence in monetary stewardship.

Even the mere speculation of a 50 bps cut, which is rare in a non-crisis setting, would suggest to investors that the Fed is no longer fully in control of the inflation-growth balance. Instead, it is reacting to political and market pressures, rather than leading with policy credibility.

This perception is critical because once confidence in the Fed’s ability to anchor inflation expectations weakens, the appeal of gold as a policy hedge strengthens.

In that scenario, it is likely that gold ETF inflows will ramp up, following the third consecutive month of inflows in August at $5.5 billion. In this light, the sustainability of the gold rally is dependent on it being repriced as a hedge against policy error rather than a hedge against inflation.

In the end, if the inflation data for September is a surprise, and the Fed effectively ignores it, gold is likely to break higher. In the same scenario, if the Fed tightens up, this is likely to spur an initial selloff, but the long-term narrative still underpins support. In the middle scenario of a sticky inflation print (only slight increase), gold investors should expect sideways price movement.

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