Gold Steadies as U.S. Debt Worries Offset Waller's Case for More Rate Hikes

The dollar and 10-year U.S. Treasury yields remained elevated for a second consecutive session, limiting gold's recovery. Higher yields increase the opportunity cost of holding gold, which does not pay interest. However, elevated borrowing costs also reflect growing concerns about government indebtedness, supporting gold's appeal as an alternative to government assets and fiat currencies.

The Federal Reserve's September meeting minutes highlighted divisions among policymakers over whether further rate increases are necessary. Some officials supported higher rates to contain inflation caused by energy and other price shocks, while more hawkish policymakers argued that increases were needed to prevent demand-driven inflation from emerging. This disagreement leaves the future path of monetary policy uncertain, contributing to volatility in gold prices.

Fed Governor Christopher Waller reinforced the possibility of further tightening, saying additional rate increases would likely be needed, although he left room for a pause in October. Markets placed the probability of an October rate hike at 17%, while the probability of an increase in December remained at 81%. Expectations of higher rates continue to weigh on gold because they make interest-bearing assets more attractive.

At the same time, concerns about rising U.S. debt provide a counterweight to these pressures. If investors become increasingly worried about the sustainability of government borrowing and the value of government-backed assets, demand for gold may strengthen as a store of value. This dynamic helps explain why gold can attract support even while Treasury yields remain high.

Geopolitical risks also remain elevated. Iran has warned that it could block shipping routes through the Strait of Hormuz that it has not authorized, increasing the risk of attacks and intimidation against tankers carrying critical shipments. Any disruption to energy supplies could push oil prices higher, renew inflation concerns and strengthen expectations of tighter monetary policy. That could weigh on gold through higher yields, although increased geopolitical uncertainty may simultaneously support safe-haven demand.