Happy Tuesday, GoldBuzzers!

Gold dipped below $4,000 on Monday while missiles were flying. That combination has a lot of people reaching for the wrong explanation, so I went back and checked the tape.

Also today: what Kevin Warsh says to Congress this morning matters more to your position than anything happening in the Strait of Hormuz.

O️k. Let’s get into it. ⬇️

Monday was ugly for the metals. Gold dropped around three percent and briefly lost the $4,000 handle, its second straight losing session, while silver fell roughly three percent to close under $58.

The cause is the same one that’s hung over July: US and Iranian forces traded heavy missile and drone strikes through the weekend, and Tehran declared the Strait of Hormuz closed, a claim US Central Command disputes.

Oil jumped more than four percent in response. Pricier oil feeds inflation, and inflation fears push the Fed toward tightening - markets now price the odds of a September rate hike as high as 70 percent, up from 29 percent a few weeks back. When rates rise, the cost of holding an asset that pays no yield rises with them, and that math is doing the selling right now.

The real test arrives this morning. June CPI lands at 8:30 am Eastern, Fed Chair Kevin Warsh delivers his first congressional testimony 90 minutes later, and Fed Governor Christopher Waller has already said a hot inflation print should put a hike on the table. A soft number could pull the September bet apart just as quickly. Retail sales follow later in the week, but today’s the one that moves the metals.

I’ll break down the CPI reaction in Thursday morning’s edition.

Monday was the kind of day that’s supposed to belong to gold.

The US and Iran exchanged missile and drone strikes over the weekend. A reinstated blockade on Iranian shipping through the Strait of Hormuz was announced from Washington. Oil jumped more than 4 percent. And gold fell out of bed, dropping about 3 percent to breach $4,000 and hit $3,993 before recovering some late ground. Silver went with it, off roughly 3 percent to around $58.

Gold is now nearly 29 percent below the intraday $5,589 record it set on January 28. The miners have had it worse. GDX closed under $74, some 36 percent under its 52-week high.

If you spent Monday evening on X, you already know the explanation the crowd landed on. Forced liquidation. Margin calls, leveraged players dumping whatever they could sell to raise cash, everything going down at once. The comparison that kept coming up was March 2020.

It’s worth being precise about what that means, because people invoke it for two reasons and usually only mention one of them.

In the COVID crash, gold did not act like a safe haven. It got sold hard. Between March 6 and March 19, 2020, gold fell 12.2 percent, from $1,673.70 to $1,469.75, in nine trading sessions. Silver fell 30.7 percent. Investors facing losses everywhere sold the assets they could actually sell, and gold is nothing if not liquid. Then it turned. Gold was back above its pre-crash level by April 9, three weeks later, and closed at a record $2,068.90 that August. Silver more than doubled off its low over the same stretch.

So when a gold bull says "March 2020," what they mean is: this is the ugly, violent part right before the launch.

I went and checked it against the tape. In my opinion, the comparison doesn’t hold, and the reason is in the numbers.

The whole point of March 2020 is that everything fell together, and stocks fell harder than gold. Over the same nine sessions that gold dropped 12.2 percent, the S&P 500 dropped 18.9 percent. That’s what a liquidity crisis looks like. Gold gets dragged down, but it gets dragged down less than the thing everyone is actually panicking about.

Yesterday was the opposite. The S&P 500 fell 0.79 percent. The Dow fell 0.26 percent. Energy stocks rose. Gold fell 3.1 percent, roughly four times harder than the broad market, on a day when equities barely flinched. Nobody was selling gold to meet a margin call, because there were no margin calls to meet. Gold was being sold on its own merits, or lack of them.

That’s not a liquidity purge. It is a repricing, and it’s aimed squarely at the Federal Reserve.

The chain that actually did the damage

Follow it in order. Hormuz disruption lifts oil. Higher oil lifts inflation expectations. Inflation expectations push the Fed toward tightening instead of easing. Futures markets now put the odds of a Fed rate increase in September at close to 70 percent.

An increase. Not a cut.

Rising nominal rates, rising real yields and a firmer dollar are about the worst possible combination for an asset that pays no income. It does not matter how alarming the headlines are. Once the market decides that a Middle East conflict means tighter money rather than looser money, gold gets sold into the fear rather than bought into it. That inverts the pattern most investors learned over the past decade, when geopolitical shocks tended to show up alongside a Fed that was already cutting. The war is not being ignored. It’s being read through the inflation channel, and that channel runs against gold.

Sentiment is at the floor, and the physical market didn't get the memo

The mood among precious metals holders is grim. Traders are describing themselves as trapped, and anyone who bought since the end of last year is now underwater. The calls for a "real capitulation" are getting louder.

Does that mean we can call a bottom from that? Sentiment can stay awful for a long time, and gold touching $3,993 on Monday is still well above where it traded a year ago, which means there’s a great deal of unrealized profit sitting above current prices and plenty of holders who may still want out.

What I will point out is that the price and the physical market are telling different stories. China's central bank added more gold in June than in any month in over two and a half years. Bar and coin demand rose 42 percent year over year in the first quarter, even as jewelry demand fell 23 percent. Consumers stepped back as prices climbed. Investors kept buying. Those buyers are not chasing momentum, and they have not gone anywhere.

What to watch

Two events today will matter more than anything. Fed Chair Kevin Warsh gives his first monetary policy testimony to Congress this morning, and June CPI arrives shortly after. Both feed directly into the rate question doing all the work in this market right now. If Warsh sounds unbothered by oil-driven inflation, September hike odds fall and the pressure on gold eases. If he sounds worried, the pressure gets worse.

Right now the market is pricing tighter money. Until that changes, geopolitics will keep working against gold rather than for it.

That’s all for this Tuesday, folks. I’ll see you on Thursday.

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Rick Adams
Founder, GoldBuzz
rick@goldbuzz.com