What gold bugs are thinking
Gold is viewed as an inflation hedge—and it is one—but it is not inflation itself, in the sense of rising prices for goods and services, that drives up the gold price. Rather, it’s the monetary conditions that produce inflation.
Investors in gold benefit when monetary policy gets easier.
Gold is a supply-constrained monetary asset that offers no yield. Lower interest rates on financial assets make the primary alternative to owning gold (bank deposits and bonds) less attractive.
Low interest rates and easier monetary policy also mean more liquidity in the financial system, i.e. more money that can find its way into hard assets like gold.
The prospect of interest rate cuts, as Jerome Powell outlined at Jackson Hole, is music to a gold owner’s ears.
Trump goes after the Fed
Potential rate cuts are certainly helpful for gold. But there may be more to this renewed demand than Powell shifting away from the restrictive monetary policy stance that has prevailed since the Fed’s first rate hike in March 2022.
Powell’s change of heart is based on concerns he has about the condition of the labor market, as we explained in our recap of his Jackson Hole speech (Powell Finally Leans Towards Rate Cuts).
But the broader context is a Federal Reserve that is under serious pressure from the White House and will eventually be reshaped by it.
President Trump feels strongly that interest rates are too high and that Jerome “Too Late” Powell has erred in not bringing them down. He is concerned that high interest rates have become too burdensome for American consumers and are needlessly slowing the economy.
For months, Trump had engaged in a lot of rhetoric about firing Powell.
He has also clearly distanced himself from this idea, first in late April and then again in mid-July, when cost overruns on the Fed’s new headquarters building became an issue.
While Trump would like to see Powell gone, he understands the legal challenge he faces, given that Powell can only be removed “for cause,” rather than on the basis of a policy disagreement.
Trump also seems to recognize the capital markets’ aversion to the world’s most important central banker being removed from office without a clear legal basis.
So Powell still has his job, at least until May 15, 2026 when his term as Chair expires. In the meantime, a process is underway to identify his replacement. This individual could be named as early as October or November of this year.
Mortgage fraud allegations
While Trump may feel he cannot fire Powell, Fed Governor Lisa Cook may be a consolation prize.
Cook allegedly applied for and obtained mortgages on multiple homes that were simultaneously owned, which she identified as primary residences.
It is easier to obtain a mortgage when the property is considered primary, and interest rates on the mortgage tend to be lower as well. It is unlawful, however, to make false statements on a mortgage application.
Lisa Cook’s termination is not in and of itself that impactful, but it could set in motion a dynamic that could conceivably lead to Powell’s dismissal. Over the long weekend, Treasury Secretary Scott Bessent faulted the Fed for its failure to conduct an independent review.
