President Donald Trump’s attacks on the Federal Reserve could fuel inflation, dampen investment and erode confidence in the US economy. For gold bulls, this is an alluring prospect that has underpinned the metal’s record rally and made it one of the year’s hottest assets.
This week, gold prices broke through $3,500 per ounce, hitting a new high. The market is betting that the Federal Reserve will soon start cutting interest rates, which helps to consolidate the three-year bull market established by large-scale central bank purchases and growing concerns over the global economy.
Since the beginning of this year, with Trump introducing a series of tariff measures and taking unprecedented actions to seek influence over the Fed’s policies, the price of gold has soared by more than a third, outpacing the gains of global stock markets, most commodities and assets such as Bitcoin. This has dragged down the US dollar and short-term US Treasury yields, which may have strengthened the president’s goal of stimulating business and consumer spending and reducing the burden of US debt repayment.
Johan Jooste, CEO of Pangaea Wealth AG, said: “Policy volatility is at an unprecedented high, especially from the White House. These policies seem either intentionally or unintentionally to weaken the US dollar, which is good news for gold.”
Attacks on the Federal Reserve, the core institution of the US economy and even the global financial market, have led Trump to attempt to fire Fed governor Lisa Cook and repeatedly criticize Chair Jerome Powell and other policymakers for not cutting interest rates quickly enough. Moreover, he can nominate a new chair to pave the way for establishing a more compliant central bank.
Against this backdrop – and given decades of experience showing that inflation remains low and economic growth more stable when interest rates are set by independent central bankers – some investors are now increasingly betting that the president’s attacks on the Fed will lead the US economy down a darker path.
One of the worst scenarios for the economy – but a positive one for gold – is a sharp fall in the US dollar as the Federal Reserve is forced to cut interest rates amid rising inflation. Both currency depreciation and rising price pressures could quickly erode the returns on US Treasuries, at a time when the government is preparing to increase borrowing, thereby enhancing the appeal of competing safe-haven assets such as gold.
On Tuesday, the dollar did rebound sharply along with gold as risk aversion swept through global markets, benefiting both assets. But with Trump’s removal of Fed governor Randal Quarles, expectations are growing that gold’s relative appeal will increase as he tries to bend the central bank – and the dollar – to his will.
A similar situation occurred in the 1970s when US President Richard Nixon pressured the Federal Reserve to keep interest rates low in the face of inflation risks, causing the dollar to plummet and pushing the price of gold up by 300%.
At present, the prospect of a similar rally in gold is being questioned as it hinges on whether Trump can successfully exert influence over interest rates. Even if Cook succeeds in challenging her dismissal in court, Trump will still be “highly focused” on lowering borrowing costs as he prepares to appoint a new Fed chair, according to Jerry Prior, CEO of Mount Lucas Management LP, a $1.7 billion hedge fund.
“We are at the early stage of rate cuts, and these expectations could change rapidly,” Pryor said. He also added that if the Federal Reserve implements three to four rate cuts by the end of the year, the gold price could reach $3,800 per ounce. However, “there is still a lot of work to be done from now until next year – we need to significantly lower interest rates to truly see the gold price rise, and this is just the first step,” he said.
Trump’s so-called “beautiful package” tax cut plan is expected to increase the US deficit by 3.3 trillion US dollars in the next ten years. The bill has intensified people’s concerns that the US will be unable to maintain a normal borrowing rate to repay existing debts, especially at the current interest rate level.
Although the overall sentiment in financial markets seems far from panic, short-term US Treasury yields have recently dropped to a four-month low as expectations of rate cuts heat up. These fluctuations at the so-called front end of the yield curve, along with the weakness of the US dollar, have helped support gold, which pays no interest and is priced in dollars, thus benefiting.
Meanwhile, the yield on 30-year Treasury bonds remains stubbornly high, as investors bet that an overly early and aggressive rate-cutting cycle could fuel inflation, erode confidence in central banks, and potentially trigger a large-scale shift of funds from US Treasuries to other defensive investments such as gold.
Alexandre Carrier, portfolio manager of DNCA Invest Strategic Resources Funds, said: “Safe-haven assets used to be dollar assets, but now they look less and less like safe havens. Gold seems to be one of the last safe-haven assets.”
Wall Street generally believes that gold will continue to rise. UBS Group said last month that gold has “returned to its peak” and raised its target price. Citigroup also raised its near-term expectations, partly due to the deterioration of the US economy. Goldman Sachs is also bullish on gold, citing strong central bank demand and investors’ diversification away from the US dollar as key supporting factors.
Fed policymakers are set to meet on September 16-17, and traders have stepped up their bets on a 25 basis point rate cut. This follows Powell, who is set to step down as Fed chair in May next year, laying the groundwork for a rate cut at the recent Jackson Hole symposium. After the meeting, investors flocked to gold-backed exchange-traded funds (ETFs) and continued to increase their holdings.
Rajeev De Mello, global macro portfolio manager at GAMA Asset Management SA, said: “My view has shifted quite significantly and I’m now more bullish on gold, mainly because the Fed has lost its independence.” He also said that the gold price could reach $4,000 by the end of 2026. “This pressure has been building up, but a speech at Jackson Hole told us that the Fed will take a dovish stance.”
According to data compiled by Bloomberg, investors’ allocation to ETFs remains below the historical highs seen during the 2020 COVID-19 pandemic and the 2022 Russia-Ukraine war. Additionally, data from the Commodity Futures Trading Commission shows that speculative bets on futures markets are also below historical highs. Taken together, this suggests that if investors start to increase their investment in US Treasuries, there is still ample room for growth in ETFs.
