Gold and silver prices experienced a sharp rally on the evening of August 5, driven by shifting market expectations regarding US monetary policy and geopolitical developments.

Traders have started reducing their bets on further interest rate hikes by the Federal Reserve, fueled by speculation that the US and Iran may reach a temporary agreement to reopen the Strait of Hormuz. This potential deal has eased inflation concerns, prompting a recalibration of rate expectations. The market now anticipates only one rate hike by the end of the year, a notable shift from the two hikes that were priced in just last week.

Since gold generates no interest, a less aggressive monetary tightening path is beneficial for the precious metal. Ryan McKay, a senior commodity strategist at TD Securities, noted that expectations for a US-Iran deal and a fading focus on broader economic risks are jointly driving the rally in precious metals. In a report, McKay stated that the current price levels for gold and silver could also trigger short-covering inflows. He added that the Bank of Korea's resumption of gold purchases serves as a positive catalyst, while recent inflows into Asian gold ETFs confirm a shifting sentiment in the region over the past few weeks.

Gold prices had fallen more than a fifth since the US-Iran conflict erupted in late February. The conflict had previously driven up energy prices, intensified inflation, and raised the likelihood of higher interest rates for a longer period, putting significant pressure on the metals. However, the Fed chose to hold policy steady at its last meeting, even as three officials voted for a rate hike.

Jamie Dutta, a market analyst at trading platform Nemo.Money, commented that there are increasing signs of a potential ceasefire agreement in the Gulf region. This implies a decline in US Treasury yields as inflation worries ease, which enhances the appeal of non-yielding assets like gold.

Adding to the dovish narrative, US Treasury Secretary Scott Bessent stated that he is not convinced a rate hike is necessary. Bessent defended the embattled Fed Chair Kevin Warsh, arguing that the market's poor reaction to Warsh’s recent press conference merely reflects traders adjusting to the central bank providing less "hand-holding" guidance. Bessent described this as a "detox" for both financial markets and the press, commending Warsh for avoiding "forward guidance" on the future path of interest rates. He noted that such guidance was partly responsible for a surge in inflation five years ago and makes it difficult to change policy direction when needed. “What would raising short-term rates actually accomplish?” Bessent asked, explaining that changes to the Fed’s benchmark rate do not impact the economy for a year or more. “Core inflation has been very quiet, aside from the impact of volatile energy prices, and I think we will continue to see that,” he concluded.