Gold Steady as Investors Await US Federal Reserve Rate Cut Decision

Gold prices remained stable on Wednesday, September 18, as investors anxiously awaited the US Federal Reserve’s decision on interest rates, expected later in the day. This decision is crucial for the gold market, as interest rates have a direct influence on gold prices. Investors are particularly interested in whether the Fed will opt for a 25-basis point or a more aggressive 50-basis point rate cut. A cut in interest rates typically favours gold, as lower rates reduce the opportunity cost of holding non-yielding assets like gold. In the lead-up to the announcement, there has been a steady demand for gold as a safe-haven investment, particularly in uncertain economic conditions.

In India, the price of 24-carat gold saw an increase of ₹180 per gram, rising to ₹7,351 per gram. Similarly, 22-carat gold increased by ₹200, now priced at ₹6,757 per gram. Despite the mid-week rise, gold prices have experienced a general downward trend over the past month. For instance, 24-carat gold has seen a 3.35% decline over the past week and a 2.6% drop over the past month. These fluctuations reflect the uncertainty in the global market, which is heavily influenced by the US interest rate decisions and other global economic factors.

On the global front, spot gold prices remained steady at $2,567.13 per ounce by early Wednesday. Earlier in the week, gold reached a record high of $2,589.59 per ounce, reflecting strong investor demand in anticipation of the Federal Reserve’s move. Meanwhile, US gold futures saw a slight increase, up by 0.1%, and traded at $2,593.60 per ounce. Market analysts are keenly watching the Federal Reserve’s decision, which is expected to be announced at 1800 GMT. According to data from the CME FedWatch tool, the market now predicts a 65% chance of a 50-basis point rate cut, up from just 34% last week. This sharp increase in expectations highlights the growing anticipation among investors.

However, some experts warn that market expectations for a 50-basis point cut may be overly optimistic. If the Federal Reserve opts for only a 25-basis point reduction, there could be a surge in yields and a strengthening of the dollar, which would place downward pressure on gold prices. Historically, higher yields and a stronger dollar tend to make gold less attractive to investors, as gold does not provide a yield and a stronger dollar raises the cost of purchasing gold in other currencies.

Gold is often viewed as a preferred investment during periods of lower interest rates. Prathamesh Mallya, DVP-Research at Angel One Ltd, noted that lower rates reduce the opportunity cost of holding gold, making it a more attractive asset for investors looking to hedge against market volatility. Moreover, geopolitical risks, such as the ongoing conflicts in the Middle East and the Russia-Ukraine war, have contributed to a sustained demand for gold, further supporting its value as a safe-haven asset.

The upcoming Federal Reserve decision has generated significant interest among both long-term investors and short-term traders. For long-term investors, patience is key, as gold tends to perform well during extended periods of economic uncertainty or when interest rates remain low. In contrast, short-term traders are advised to proceed with caution, as any deviation from market expectations could lead to volatile price swings in the gold market. Mallya pointed out that a larger 50-basis point cut would likely boost gold prices further as the dollar weakens, whereas a smaller 25-basis point cut could result in short-term pressure on gold as the dollar strengthens and yields rise.

Despite the immediate focus on the Federal Reserve’s rate cut decision, other factors continue to influence the gold market. Recent US retail sales data showed a 0.1% increase in August, suggesting that the economy remains relatively strong. This unexpected rise in retail sales has added another layer of complexity to the gold market, as a stronger economy could reduce the likelihood of deeper rate cuts by the Federal Reserve. Nevertheless, ongoing geopolitical tensions and the broader economic outlook continue to make gold an attractive investment option for those seeking to preserve value during uncertain times.

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In conclusion, the Federal Reserve’s rate cut decision is expected to be a pivotal moment for the gold market. While a 50-basis point cut could provide a short-term boost to gold prices, a smaller 25-basis point reduction could weigh on gold in the near term. However, long-term demand for gold is likely to remain supported by geopolitical risks and ongoing uncertainty in the global economy. Investors are advised to monitor the outcome of the Fed’s decision and assess how it might impact their gold holdings, as both immediate and longer-term factors will continue to influence gold’s performance in the months ahead.

Reference: CNBC-TV18