Gold Reaches New High Following First Fed Rate Cut Since 2020

Gold prices surged to an all-time high, reaching over $2,600 per ounce after the US Federal Reserve initiated its first interest rate cut since 2020. This 50-basis-point reduction marked a significant change in monetary policy, aimed at supporting the labor market and stabilizing the economy amidst ongoing concerns. The rate cut, part of the Fed’s broader strategy, reflected a consensus among 10 of 19 officials for further reductions in upcoming meetings.

Lower interest rates generally benefit assets like gold, which do not provide any yield. In this case, gold’s price initially spiked by 1.2%, only to pull back after Federal Reserve Chair Jerome Powell’s press conference. Powell emphasized that this rate cut should not be interpreted as a new pace or long-term trend for monetary policy, creating mixed reactions in the market. Treasury yields and the US dollar dipped following the Fed's decision, a typical response to lower interest rates.

Analysts have pointed out that the shift in rate policy could signal broader economic concerns, with some experts predicting that fears of a recession may drive further demand for gold. Will Rhind, founder of GraniteShares Advisors, commented that the weakening dollar, combined with falling interest rates, could push gold prices even higher, especially if recessionary pressures grow. Gold has historically been considered a safe-haven asset, particularly during periods of economic uncertainty.

ALSO READ| Fed Slashes Rates by 50 Basis Points in a Pre-emptive Strike Against Economic Slowdown

The gold market has seen significant volatility over the past year, with prices increasing by more than 24% due to factors such as rising demand from emerging markets and large-scale purchases by central banks, particularly in Asia. At the beginning of 2024, this demand drove gold prices upward, but more recently, the market’s attention has shifted towards the Fed’s monetary policy and the overall health of the US economy.

In particular, gold’s inverse relationship with real yields, which had weakened in recent years, appears to be re-establishing itself. As yields fall in response to rate cuts, gold prices tend to rise. This dynamic has been supported by increased investments from Western countries, with gold-backed exchange-traded funds (ETFs) seeing inflows over the past 12 weeks. Additionally, long-only positions in Comex gold futures have reached their highest levels in four years.

ALSO READ| Foreign Investors Turn Cautious on Indian Markets Despite US Fed Rate Cut

Looking ahead, the trajectory of gold prices will likely depend on further Fed actions and global economic developments. If recession fears mount, gold could see an additional surge as investors seek protection against market downturns. On the other hand, if economic stability returns, the recent rally may lose momentum. For now, however, gold remains a key asset to watch as the Fed navigates its new policy course.

Reference: Bloomberg