What’s Next for Gold in a Changing Rate Cycle
What’s Next for Gold in a Changing Rate Cycle
Here’s what the Fed’s rate cuts could mean for the gold markets and investors interested in the commodity going forward…
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” – Federal Reserve Chairman Jerome Powell, August 23, 2023
Last week, the Federal Reserve all but cemented its path to cutting rates. What it really means for the U.S. economic outlook is worth considering.
While the headlines will focus on whether the FOMC goes with a 25 or 50 basis point cut to interest rates based on the latest data, history shows us that certain responses often emerge.
Often, rate cuts at the Fed lead to a weakening U.S. dollar. Globally, that has signaled a boost for gold.
Now, to be clear, traders are well aware of this and have likely already hedged and any potential rally is already baked in. The expectation of a rate cut has been on the table for a while now. So, don’t expect an immediate rally in gold to transpire once the Fed makes its announcement.
Wall Street Says “Go for Gold”
In fact, just last week, my previous employer, Goldman Sachs had its analysts put out a note titled “Go for Gold” that signaled a very bullish take from some of the most tapped-in folks on Wall Street.
Analysts wrote that their, “preferred near-term long is gold. It remains our preferred hedge against geopolitical and financial risks, with added support from imminent Fed rate cuts and ongoing EM central bank buying."
The bank reaffirmed its expectation that gold would hit $2,700 per ounce, though it adjusted the forecast for early 2025.
And it’s not just Goldman looking toward gold as a place for security as the Fed prepares to cut its rates for the first time in years.
Data from the World Gold Council (WGC) shows that physically-backed gold exchange-traded funds (gold ETFs) have seen global inflows rise four months in a row. Based on the WGC data, activity from North America even outpaced Europe and Asia over the summer – but overall Western activity contributed to the majority of inflows.
Central Banks and the China Question
Beyond Wall Street, central banks around the world will also likely respond to the Fed’s rate cuts not just with their own monetary policy accommodations – but by continuing to build their gold reserves.
So far this year, central banks appear to be accumulating gold at a record pace to top their all-time purchases. In 2023, central banks had the second highest annual purchase in history – only followed by their stockpiling in 2022. Central banks from Poland to India and from Turkey to the Czech Republic have all increased their gold reserves over the summer.
As we reported in July, while China’s central bank may have taken a “breather” in its rapid accumulation of gold – if pricing for the U.S. dollar changes or gold prices soften even to a small degree, expect China to jumpstart its gold purchasing once again. Yes, that is because the Chinese central bank could get a good deal. But more importantly, it could protect against any potential changes over the long term for the commodity.
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So, will China reverse its course immediately if gold prices lower? That timeline remains unclear. But its population continues to have a large demand for gold that seems unrelenting – even in the face of government quotas.
If, or when, China does report new gold purchases it is likely that will be a positive boost for gold as some market watchers are forecasting.
The Fed, Rate Cuts and Where to Look Next
The truth is that from central banks to Wall Street, financial analysts view gold’s role as a store of value. This is important because it signals that gold is an area that can not only serve as a hedge – but as a source of financial upside.
What we’ve seen is that over the last three years, the Fed has been squarely focused on inflation. Now, a change is emerging, and labor conditions are beginning to show signs of weakness. The dual mandate of the Fed is seemingly in a recalibration mode – all because July showed that year-over-year PCE inflation remained above target at 2.5% in and the unemployment rate at 4.3%.
As Fed chairman Jerome Powell said during his Jackson Hole remarks in August, “The upside risks to inflation have diminished. And the downside risks to employment have increased.”
For investors, this inflection point matters because, as the Fed begins to cut interest rates, the question remains over whether it can secure a soft landing or see a capitulation in the economy. Anything less than a soft landing could negatively impact the financial markets, the strength of the U.S. dollar and the state of labor markets.
For gold, something new is emerging, as we noted above. Unlike the last several years, Western capital from the U.S. to Europe has been shifting back into the gold market. If gold has experienced a notable rally without this shift, it’s reasonable to suggest that, driven by Fed rate cuts, this pattern could unlock even more momentum in a post-Fed-rate-cut world.
For market watchers or those looking to tap into this momentum, one ETF worth watching is the abrdn Physical Gold Shares ETF (SGOL), which looks to reflect the performance of the price of gold bullion and has a very low expense ratio.
As we enter this period of inflection for gold, we’ll have more updates to share. Please stay tune for special events here at Prinsights throughout this month.