August 16, 2026
Following a sharp rise in January, the price of gold entered a correction phase towards the end of winter. Initially, this correction was just as dynamic as the previous rise and caused concern amongst many gold investors, particularly as the price of gold initially…
A persistent lethargy gripped the gold market. US President Donald Trump was unable to bring the military conflict with Iran to an end, the global economy showed clear signs of looming weakness and the general level of crisis remained high, yet the price of gold remained unimpressed by these developments and persisted in a phase of weakness.
This came to an end in the first few days of August, when the price of gold rose by seven per cent within just five trading days. This sharp rise not only came as a complete surprise to many investors, but also inevitably raises the question of whether we have merely witnessed a brief but intense flash in the pan, or whether the starting signal for a longer-term rise has been given.
There are currently seven reasons to believe that the sudden rise at the start of August was not a flash in the pan, but could well mark the beginning of a sustainable and longer-lasting upward trend. In a seven-part series, we aim to analyse the key reasons behind the sharp rise in the price of gold by more than seven per cent within a single trading week.
We begin today with a factor that has had the strongest short-term impact on the price: the shift in expectations regarding the US Federal Reserve’s future interest rate policy.
A disappointing economic report as the trigger
On 30 July, the Bureau of Economic Analysis published its preliminary estimate of US gross domestic product for the second quarter. The result was significantly weaker than expected: the US economy grew at an annualised rate of just 1.5 per cent, down from 2.1 per cent in the first quarter. Economists surveyed by Reuters and FactSet had forecast growth of around 2.0 to 2.1 per cent on average. Whilst the shortfall relative to expectations was not dramatic, it was nonetheless noticeable.
Just a few days later came the next setback: the July labour market report showed a decline of 23,000 jobs in non-farm employment. The unemployment rate climbed to 4.1 per cent, and employment figures for previous months were revised downwards by a total of 103,000 jobs. Wage growth also slowed to 3.2 per cent, the lowest level since May 2021. For a labour market long considered robust, this was an unusually weak signal.
Why this matters for gold
As is well known, gold does not pay interest. Investors holding physical gold or related securities therefore forgo the interest they could receive if they were to buy corporate or government bonds instead of gold. The higher the interest rate level and the higher the expected real returns, the greater the opportunity cost of holding gold.
This is a classic factor weighing on the price of gold. However, if these expectations reverse – because the market considers tighter monetary policy less likely or even begins to price in further interest rate cuts by central banks – the opportunity costs fall, and gold becomes a more attractive investment relative to bonds.
This is precisely what was observed last week. Weak economic and labour market data caused market expectations of a further interest rate rise in September to decline significantly. At the same time, the US dollar and real yields came under pressure, whilst gold benefited from precisely this combination. The strongest single day of the rally came on Friday following the release of the labour market figures. This follows a pattern of behaviour that has repeatedly been seen in the past when US data has been unexpectedly weak.
A short-term signal with limited significance
Just as one swallow does not make a summer, a single economic report or set of labour market data does not in itself signal a long-term shift in monetary policy. The US Federal Reserve itself signalled at its meeting at the end of July that it continues to take inflation risks seriously. We will address this in more detail in a later part of this series.
Nevertheless, the market’s strong reaction demonstrates just how sensitive the price of gold is in the short term to any shift in interest rate expectations. If the perceived probability of rising interest rates falls, the market responds almost immediately with higher prices for gold and silver.
For investors, this means that the forthcoming US economic data – in particular further labour market and inflation reports – are likely to continue to exert an above-average influence on short-term gold price movements over the coming weeks.
If gold had risen at the start of August for this reason alone, the situation for gold investors would certainly be cause for concern. However, gold is currently supported not only by short-term economic factors, but also by structural ones. These do not have as immediate an effect as the short-term economic factors, but unfold their impact slowly yet steadily over time.
The next instalment in this series will focus on one of these structural factors, which points far beyond the current data: the dwindling confidence in the US dollar as a global reserve currency.
