Happy Sunday, GoldBuzzers!

If you looked at your screen around lunchtime on Friday and wondered what just happened to gold, this one's for you. Kevin Warsh gave his first Jackson Hole speech, gold dropped 3 percent, silver dropped 4, and the odds of a September rate hike went from a third to almost 60% in less than an hour.

Today I'll walk through what he said, why it hit the metals so hard, and why the $40 trillion elephant in the room makes the hawkish story much harder to sustain than Friday's tape suggests.

Ok. Let’s get into it. ⬇️

Friday didn't go the way metals bulls wanted. Fed Chair Kevin Warsh gave his first Jackson Hole speech since taking the chair in May and, true to form, offered no forward guidance at all. The tone still leaned hawkish. He said this summer's cooler inflation prints don't tell him underlying trends have meaningfully improved, and he pointed out that financial conditions don't look restrictive.

Traders (and high frequency algorithms) did the math quickly. Odds of a September rate hike jumped from about 35 percent to over 57 percent on CME FedWatch, and the dollar rallied close to 1 percent with yields climbing alongside it.

Gold, which had touched a three-month high near $4,696 on Tuesday, dropped about 3.2 percent to finish near $4,458 and ended the week down by roughly the same amount. Silver fared worse. After failing to hold above $71 earlier in the session, it slid around 3.6 percent to close near $66, leaving the gold-to-silver ratio close to 67, about where it started the week.

Miners took the hardest hit, with GDX giving back a chunk of what had been a 40 percent month, though it's still on track for its best month since 2020. The next Fed decision lands September 16.

I'm sometimes asked whether fundamentals or technicals drive the precious metals markets. Fundamentals are the reasons prices should move: inflation, Fed policy, debt, supply and demand. Technicals are what the price itself has actually been doing.

It's a question I researched hard at the start of the four-year Theseus project, and the answer really surprised me. Fundamentals turned out to be very poor predictors of future prices in precious metals. My research found a significant edge in the markets, but it all came from technicals.

But there's a catch. Over days rather than years, fundamentals absolutely do move the markets, and in my opinion, Friday was a perfect example.

Gold spent August putting in its best month since 1999, up close to 14 percent, and touched a three-month high just under $4,700 on Tuesday. Silver poked above $71 on Friday morning. Then Kevin Warsh stood up at Jackson Hole at 10am Eastern and both metals fell out of bed.

Spot gold was near $4,600 when he started talking. It finished around $4,456, down 3.1 percent. Silver did worse, closing at $66.21, down 4.2 percent. Miners fell harder still.

The damage came through interest rates. Before the speech, traders put the odds of a Fed rate hike in September at about 35 percent. By the close it was 57.5 percent. That lifted short-term bond yields and pushed the dollar up half a percent, and those are the two things gold likes least. Gold pays no interest, so higher yields mean you give up more by holding it. A stronger dollar makes it pricier for buyers outside the US.

What he actually said

Warsh opened with a story about the different kinds of hikes you can take on the Jackson Hole trails, and managed to use the word ‘hike’ several times before he got anywhere near policy. Plenty of trading systems scan Fed speeches for exactly that word and trade on it in real time. It immediately struck me that he was having a quiet laugh at their expense.

He didn't actually announce a hike, but markets treated what he did say as close enough.

The Fed's inflation target is 2 percent, measured by an index called PCE. Warsh called that "a firm, fixed target." He said this summer's better-than-expected inflation numbers "do not tell me that underlying trends have meaningfully improved." Then he put figures on it: inflation is running at 3.7 percent over the past year, and 4.1 percent over the last six months. In other words, it's been getting worse lately, not better.

Then the line that really moved everything: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

He added that borrowing conditions aren't tight enough to slow the economy, and that the job market is "broadly consistent with full employment." Put those together and you get a Fed chair who sees no reason to cut and a growing case to hike.

A routine correction to the jobs data landed in the same 10am slot, and it came in less bad than traders had feared. Gold bulls wanted a weak number to make a hike look unlikely. They didn't get one.

Warsh can talk tough. Whether he can deliver a series of hikes is a different matter, and the constraints aren't subtle.

The national debt crossed $40 trillion on August 19. July's deficit was $432 billion, the fourth largest monthly shortfall on record, and the government now spends over $1 trillion a year on interest alone. Every hike makes that bill bigger.

Nine days before Warsh spoke, the Treasury did something telling. Long-term bond yields had been climbing, so it bought back some of its own older bonds to push them down. That's one arm of government acting to keep its own borrowing cheap. It was also the main reason gold ran to $4,700 in the first place, because investors read it as a sign the debt is getting increasingly hard to manage.

So you've got a Fed chair saying rates may need to rise, and a Treasury that has already shown it will step in when borrowing gets expensive. Those two things are pulling in opposite directions. A single hike in September is entirely possible. A long campaign like 2022, with the debt this large, is much harder to picture.

On that reading, Friday's speech was as much about proving he takes inflation seriously as it was a firm commitment. Warsh said as much himself, in a line that got less exposure: "I stand here today committed to a discipline, not a decision."

And the job market isn't as healthy as "full employment" sounds. Unemployment fell to 4.1 percent in July, but only because 264,000 people stopped looking for work. The economy actually lost 23,000 jobs that month. A Fed hiking into that has less room than the headline number suggests.

Friday damaged momentum more than it broke the trend.

Gold closed just below its 200-day moving average near $4,500, a line many traders treat as the divide between a healthy uptrend and trouble. Gold cleared it on the way up. Whether it gets back above quickly is the first thing to watch. Silver gave back its $71 push but held in the high $60s, near the upward trendline from early August.

A sharp drop that stops at a known level usually means late buyers got shaken out at once. It's not what a top typically looks like. It doesn't rule out another leg down if next week's data backs up the hawkish story.

None of this changes what brought gold and silver into this bull market. Inflation is still close to double the target. Central bank demand hasn't gone away. And the tension between a Fed that wants higher rates and a Treasury that needs cheaper borrowing is exactly what gold has historically fed on.

The August jobs report lands Friday, September 4, the last major employment reading before the Fed meets on September 15 and 16. A strong report backs up Warsh's "work to do" standard. A weak one tests whether he treats his own words as a rule or a posture.

Until then, the metals will likely move day to day on rate expectations and the dollar rather than the bigger debt picture. That picture hasn't changed. It's just not what traders are pricing this week.

If you already hold physical metal or quality miners, Friday was a volatility event inside a larger bull market. If you've been waiting for a cleaner entry, the next two weeks will show whether the mid-$4,400s in gold and the mid-$60s in silver attract real buying or just mark a pause before another test lower.

In the meantime, Warsh says the Fed has work to do. The $40 trillion question is who's going to let him do it.

That’s all for this Sunday, folks. See you on Tuesday.

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Rick Adams
Founder, GoldBuzz
rick@goldbuzz.com