Investors are likely to learn that Kevin Warsh, the new Federal Reserve chairman, is a master of the Potomac two-step.

He won’t be appearing on Dancing with the Stars, though, as this two-step describes how Washington officials say one thing and do another, while making everyone think they are taking positive action.

Even though Warsh just made hawkish comments about inflation, and many investors now expect that the Fed will soon increase interest rates, nothing of the sort is likely to happen before the Nov. 3 midterm election, based on my read of Washington and trading flows.

Rather than upsetting President Donald Trump ahead of competitive congressional elections that are critical to the administration’s agenda, Warsh is likely to say recent economic data is inconclusive or that more data must be reviewed before the Fed increases interest rates.

Such a statement could be positioned as clarifying his comment that inflation was running above the bank’s 2% target—a fact that everyone knows anyway—that he made at the Jackson Hole Economic Policy Symposium. The Federal Reserve’s rate-setting committee concludes a two-day meeting on Sept. 16.

Other members of the Fed may disagree with Warsh, and the bond market’s behavior may even indicate that bond investors expect higher rates. But political realities are likely to dominate decisions in September and at the conclusion of the rate-setting committee’s meeting on Oct. 28. The Dec. 9 meeting is tougher to forecast because it is harder to work around all the economic reports and administration policies that will be released over the next four months.

This nonconsensus view that politics will influence the Federal Reserve’s deliberations before the midterm elections—something that isn’t supposed to happen—is animated by a renewed focus among the institutional investor community on “debasement trades.”

These trades, which primarily involve gold, other metals, and even Bitcoin, are used to hedge concerns about large government deficits, currencies, and monetary and fiscal policies. U.S. government debt recently surpassed $40 trillion.

If the Fed doesn’t raise interest rates, investors may fret that politics, not monetary policy, is guiding the bank’s thinking. If that happens, the debasement trade would accelerate—and that favors buying gold.

Oddly, gold declined on Warsh’s hawkish comments, but that likely reflected momentum traders taking profits on gold’s extraordinary gains in August. At one point in the month, the SPDR Gold Shares exchange-traded fund, the primary equity proxy for gold, was up about 15%; it ended the month up about 11%.

Still, it’s unlikely that recent gold weakness portends the onset of a prolonged decline. Institutional investors, here and abroad, are increasingly discussing the need to own gold and other precious metals. Moreover, central banks, particularly China, are buying gold to diversify and hedge their exposure to U.S. bonds and the surging national deficit.

Investors can take advantage of the recent weakness in gold by establishing positions that increase in value if SPDR Gold Shares resumes its rally.

With SPDR Gold Shares around $398, investors could buy the November $410 call and sell the November $440 call.

The call spread—buying a call and selling another with a higher strike price but same expiration—is a cost-effective way to profit from a rally. If SPDR Gold Shares are at $440, the spread’s maximum profit is $21.85 ($30 spread minus the trade cost). The trade fails if the ETF is below $410.

During the past 52 weeks, the SPDR Gold Shares have ranged from $320.24 to $509.70. The ETF is up about 6% this year, compared with about 13% for the S&P 500 index.

Should investors think the Fed’s deliberations are influenced by political considerations, gold’s price could surge as investors clamor to buy assets that are perceived as safe from political meddling.

Write to editors@barrons.com

Investors are likely to learn that Kevin Warsh, the new Federal Reserve chairman, is a master of the Potomac two-step.

He won’t be appearing on Dancing with the Stars, though, as this two-step describes how Washington officials say one thing and do another, while making everyone think they are taking positive action.

Even though Warsh just made hawkish comments about inflation, and many investors now expect that the Fed will soon increase interest rates, nothing of the sort is likely to happen before the Nov. 3 midterm election, based on my read of Washington and trading flows.

Rather than upsetting President Donald Trump ahead of competitive congressional elections that are critical to the administration’s agenda, Warsh is likely to say recent economic data is inconclusive or that more data must be reviewed before the Fed increases interest rates.

Such a statement could be positioned as clarifying his comment that inflation was running above the bank’s 2% target—a fact that everyone knows anyway—that he made at the Jackson Hole Economic Policy Symposium. The Federal Reserve’s rate-setting committee concludes a two-day meeting on Sept. 16.

Other members of the Fed may disagree with Warsh, and the bond market’s behavior may even indicate that bond investors expect higher rates. But political realities are likely to dominate decisions in September and at the conclusion of the rate-setting committee’s meeting on Oct. 28. The Dec. 9 meeting is tougher to forecast because it is harder to work around all the economic reports and administration policies that will be released over the next four months.

This nonconsensus view that politics will influence the Federal Reserve’s deliberations before the midterm elections—something that isn’t supposed to happen—is animated by a renewed focus among the institutional investor community on “debasement trades.”

These trades, which primarily involve gold, other metals, and even Bitcoin, are used to hedge concerns about large government deficits, currencies, and monetary and fiscal policies. U.S. government debt recently surpassed $40 trillion.

If the Fed doesn’t raise interest rates, investors may fret that politics, not monetary policy, is guiding the bank’s thinking. If that happens, the debasement trade would accelerate—and that favors buying gold.

Oddly, gold declined on Warsh’s hawkish comments, but that likely reflected momentum traders taking profits on gold’s extraordinary gains in August. At one point in the month, the SPDR Gold Shares exchange-traded fund, the primary equity proxy for gold, was up about 15%; it ended the month up about 11%.

Still, it’s unlikely that recent gold weakness portends the onset of a prolonged decline. Institutional investors, here and abroad, are increasingly discussing the need to own gold and other precious metals. Moreover, central banks, particularly China, are buying gold to diversify and hedge their exposure to U.S. bonds and the surging national deficit.

Investors can take advantage of the recent weakness in gold by establishing positions that increase in value if SPDR Gold Shares resumes its rally.

With SPDR Gold Shares around $398, investors could buy the November $410 call and sell the November $440 call.

The call spread—buying a call and selling another with a higher strike price but same expiration—is a cost-effective way to profit from a rally. If SPDR Gold Shares are at $440, the spread’s maximum profit is $21.85 ($30 spread minus the trade cost). The trade fails if the ETF is below $410.

During the past 52 weeks, the SPDR Gold Shares have ranged from $320.24 to $509.70. The ETF is up about 6% this year, compared with about 13% for the S&P 500 index.

Should investors think the Fed’s deliberations are influenced by political considerations, gold’s price could surge as investors clamor to buy assets that are perceived as safe from political meddling.

Write to editors@barrons.com