Trump to Interview Fed Chair Candidates: A Dove is Most Likely to Be Selected, Bullish for Gold

1. Introduction

TradingKey - In recent years, gold has experienced an epic bull market, with prices soaring continuously, allowing gold bulls to reap substantial profits (Figure 1). Looking ahead, can gold bulls—particularly medium- to long-term investors employing a buy-and-hold strategy—continue to achieve high returns? To address this question, the focus must be on the Federal Reserve’s medium-term monetary policy and the selection of its next chair. On 15 October, U.S. Treasury Secretary Bessent stated that 3-4 candidates are expected to be submitted to Trump for interviews in December, following Thanksgiving. We believe Trump is likely to appoint a dovish Federal Reserve chair, which could lead to larger and faster interest rate cuts, providing strong bullish support for gold prices.

Figure 1: Gold Prices ($/oz)

Source: TradingKey

2. Bessent to Submit Candidate List

On Wednesday, 15 October, Bessent announced that the initial pool of 11 candidates for the Federal Reserve chair position had been narrowed down to five. According to prior media reports, these candidates are: current Federal Reserve Vice Chair for Supervision Michelle Bowman, current Federal Reserve Governor Christopher Waller, current National Economic Council Director Kevin Hassett, former Federal Reserve Governor Kevin Warsh, and BlackRock executive Larry Fink.

While Bessent noted that the selection of candidates is based on two criteria—open-mindedness and judgment of the current economic situation—we anticipate that Trump’s final decision will prioritise the first criterion. Specifically, the next Federal Reserve chair will likely need to demonstrate to Trump a clear stance in favour of significant interest rate cuts.

The new dovish Federal Reserve chair is expected to take office by mid-next year, impacting the gold market in both the short and medium term. In the short term, markets will likely price in expectations of the chair’s loose monetary policy, influencing gold prices. In the medium term, the chair is highly likely to implement more aggressive interest rate cuts. For instance, recent activity in the options market shows traders betting on at least one 50-basis-point rate cut by the Federal Reserve before year-end, a more aggressive move than the previously anticipated two 25-basis-point cuts.

3. What Would Be the Impact on Gold Prices if a Dovish Chair Takes Office?

The Federal Reserve’s continued interest rate cuts and other accommodative monetary policies significantly drive gold price increases for the following reasons: First, gold is a non-yielding asset, generating no interest or dividends. Rate cuts reduce the returns on interest-bearing assets like Treasury bonds and savings accounts, narrowing the yield gap with gold. For example, from September to December 2024, the federal funds rate is expected to decline from 5% to 4.5%, leading to lower short-term Treasury yields. This makes gold a more attractive investment, boosting its demand and price. During this period, gold prices rose from approximately $2,493 per ounce to $2,718 per ounce, a gain of over 9%.

Second, interest rate cuts typically signal an accommodative monetary policy, which increases market liquidity by boosting money supply, thereby heightening inflation expectations. Currently, inflationary pressures in the U.S. remain significant. The Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) price index have consistently exceeded 3%, well above the Federal Reserve’s 2% inflation target. Additionally, uncertainties from U.S.-China trade frictions further exacerbate inflationary pressures through increased trade costs and supply chain disruptions, amplifying the risk of rising prices. As a traditional hedge against inflation, gold’s value-preserving qualities become more attractive to investors when inflation expectations rise, naturally driving up demand for gold.

Third, interest rate cuts directly reduce the attractiveness of the U.S. dollar, pushing it into a depreciation trend. Given the long-term negative correlation between gold prices and the dollar’s value, a weaker dollar typically drives gold prices higher. This trend has been particularly pronounced in the market performance since the beginning of this year. Multiple factors have converged to amplify this effect: escalating global trade frictions have undermined confidence in the dollar; a significant slowdown in U.S. economic growth has weakened the dollar’s support; and the ongoing global trend toward de-dollarisation has further reduced demand for the dollar. Under the combined influence of these factors, the U.S. dollar index has continued to decline, while international gold prices have surged by approximately 57% over the same period, strongly validating the negative correlation between the dollar and gold prices.

4. Mid-Term Decline in Inflation Supports Federal Reserve Rate Cuts

As previously noted, U.S. inflation is unlikely to see significant declines in the short term. However, from a mid-term perspective, inflation is expected to moderate, driven by three key factors: First, the continued recovery of global supply chains, combined with potential easing of U.S.-China trade tensions, would directly lower import costs. Second, stable energy prices are likely to reduce their upward inflationary pressure. Third, a softening labour market may curb wage growth, further alleviating inflationary pressures. A mid-term decline in U.S. inflation would create favourable conditions for the incoming dovish Federal Reserve chair to implement more accommodative monetary policies.

5. Conclusion

In summary, U.S. Treasury Secretary Bessent will submit a list of candidates for the next Federal Reserve chair for Trump’s interviews following Thanksgiving. We anticipate that Trump will ultimately select a dovish chair. Consequently, accommodative monetary policies are expected to provide bullish support for gold prices, with the potential for gold to continue reaching new historical highs over the next 12 months.

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