In the wake of U.S. prosecutors launching a criminal investigation into Federal Reserve Chair Jerome Powell, concerns over the Fed's independence have ignited a surge in gold, which continues to smash through all-time highs. During Monday's U.S. trading session, gold soared by over 2%, pushing its historic record above $4,620, while silver skyrocketed more than 7%. By the time of writing, both metals had retreated from their peaks.
Kevin Thozet, a member of the investment committee at asset management firm Carmignac, suggested the risk lies in the possibility that the White House and the Fed may "show no more mercy" towards each other in the coming quarters. Powell stated on Sunday that the Fed had received a grand jury subpoena and threats of criminal prosecution from the Justice Department, related to his congressional testimony concerning a $2.5 billion renovation of the central bank's headquarters. Investors indicated that the movements in the U.S. dollar and gold reflect a risk that U.S. policy interest rates could be artificially suppressed below their appropriate level due to political pressure, potentially leading to prolonged higher inflation and increased monetary policy uncertainty. Mike Riddell, a portfolio manager at Fidelity International, remarked, "We've seen this before – political pressure on the Fed translates to a weaker dollar, higher long-term U.S. Treasury yields, and rising inflation expectations." However, the scale of market volatility remains relatively contained, with many investors still betting that rate-setters will maintain their independence. Jan Hatzius, Chief Economist at Goldman Sachs, stated at a conference in London, "My expectation is still that the committee will continue to make decisions based on its mandate and the economic data." Gold and silver have become embroiled in a trend known as the "currency devaluation trade," as investors fear that pressure to cut interest rates will ultimately devalue dollar-denominated assets. This concern, coupled with a flight to safe-haven assets, has fueled the record-breaking rally in precious metals. John Woods, Asia Chief Investment Officer at Lombard Odier, stated, "Gold is the premier geopolitical risk asset, more so than any other." "There is simply too much geopolitical risk in the market right now." Just over a week after U.S. forces took control of Venezuelan leader Maduro, U.S. President Trump stated that he is considering military action against Iran, citing the regime's crackdown on nationwide protests. The Justice Department's investigation into Powell follows a campaign by the Trump administration aimed at forcing the Fed to implement more substantial interest rate cuts, despite lingering concerns about a resurgence of inflation. The latest clash between the White House and the Fed occurs against a backdrop where long-term government bonds globally were already facing significant challenges. Last week, the gap between the yield on the 30-year U.S. Treasury and the two-year note widened to 1.4 percentage points, its largest spread in four years, a situation exacerbated by global concerns over government borrowing. Carmignac's Thozet suggested that inflation expectations might "grind higher" as the "probability increases of a MAGA-aligned candidate being appointed as a Fed governor."
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