For the first time in four years, the U.S. central bank recently reduced the cost of borrowing. In September, the Federal Reserve cut interest rates by 50 basis points, bringing the federal funds rate to a range of 4.75% to 5%. It’s a big deal for the U.S. economy and it will no doubt have an impact on various assets, including gold.
But to really understand what the rate cut means for gold, it’s important to look at why the interest rates were reduced. And perhaps more importantly, what message the cut sends out about the U.S. economy.
Crucially, rate cuts are usually a sign that the Fed is concerned about slowing economic growth. So, by reducing the cost of borrowing, it aims to stimulate consumer and business spending – and give the economy a boost. Lower rates address the cooling labour market by allowing businesses to hire more workers. Generally, therefore, a rate cut suggests that the Fed sees risks to continued economic growth, inflation, or employment.
But the rate cut isn’t all bad news – especially for gold. The relationship between interest rates and gold prices has historically been inverse, meaning that lower rates tend to support higher gold prices. Here’s why:
⭐ Lower opportunity cost of holding gold versus other assets
When interest rates are lower, investors prefer gold because the returns on savings accounts, bonds and other interest-bearing investments are reduced. After the rate cut, gold prices rose more than 1% to hit an all-time high, before easing but remaining strong. The graph below shows how lower borrowing costs reflect on the price of gold.
⭐ Potential for a weaker U.S. Dollar
Interest rate cuts often lead to a weaker U.S. dollar, making it less attractive to foreign investors. But a weaker dollar tends to make gold cheaper for international buyers, boosting demand and potentially driving up its price.
⭐ Inflation concerns
Although rate cuts often aim to boost economic activity, they can stoke inflation fears. Because gold is considered a hedge against inflation – because its value usually rises as the purchasing power of paper currency drops – investors may favour gold as a safe option if they think inflation could rise.
⭐ Gold is seen as safe
Finally, rate cuts can send out warning signs about economic growth or stability. This uncertainty can drive investors toward safe-haven assets like gold. The demand for gold could increase, pushing prices higher.
So, how did gold react to the Fed's announcement of rate cuts?
Immediately after the announcement, the price of gold soared to a record high before settling again. Spot gold fell 0.4% to $2,560.29, after earlier rising to $2,592.39 per ounce. Meanwhile, U.S. gold futures settled 0.2% higher at $2,598.60.
As explained earlier, this rate cut could see gold increase in demand because of lower opportunity costs, potential U.S. dollar weakening, inflation concerns, and heightened investor appetite for safe-haven assets. And an increase in demand raises the price of gold.
However, it’s possible that the expected rate cut may have already been priced into the market. In other words, because rate cuts have previously sent gold prices up, this expectation may have already been factored in – and the recent cut may not have as big of an impact as you’d expect.
But the rate cut isn’t the only thing influencing the price of gold. 2024 has been a good year for gold for several key reasons:
⭐ Strong central bank buying
There has been a high level of central bank demand for gold. In the last few years, central banks around the world have increased their gold holdings. This directly increases demand, signals confidence in gold and tightens the available supply for other buyers, sending prices higher.
⭐ Economic uncertainty
Geopolitical tensions, including conflicts in the Middle East and Europe, as well as the U.S. election in November and concerns over economic stability all create uncertainty. This increases demand for safe-haven assets like gold.
⭐ Inflation concerns
Persistent inflationary pressures have driven investors to seek gold as a hedge against currency devaluation and rising consumer prices. Gold is appealing when inflation is high, because the metal keeps its value.
⭐ Global monetary policies
The Fed isn’t the only central bank to cut interest rates this year. The European Central Bank (ECB) 🇪🇺 cut its deposit rate by 0.25 percentage points to 3.5% in September, and the Bank of Canada 🇨🇦 has cut its rates three times since June. This may mean that banks will lower the rates they offer savers, making gold a more attractive investment.
What are gold experts saying about the rate cut?
In recent days, gold prices have soared to more than $2,700. The graph below shows how prices have steadily risen and are now at an all-time high.
Many analysts also believe that there is still room for gold prices to rise further in the near future.
🏦 Goldman Sachs' analysts expect a target gold price of $2,700 per troy ounce for early 2025.
🏦 City Group predicts gold prices will surpass $3,000.
🏦 Our resident expert Nicky Shiels estimates that the price of gold could reach around $3,400 by March 2025.
However, Shiels highlights that the price of gold is affected by many complex factors - not just interest rates. What’s going on geopolitically and financially at the time is crucial.
For example, after two previous 50 basis point cuts in 2001 and 2007, the price of gold initially dropped before rallying. But, Shiels explains, the market structure for gold is very different now.
She said: “Gold prices are already 2.5x the price of gold in 2007, which was <$1000. In addition, 2007 was event driven (Lehman) while gold has had plenty of time to price in the expected future Fed cuts in 2024.”
Shiels suggests that the recent cut isn’t a “deep recession preview” but an “opportunity to add inflation assets”.
Of course, the future remains to be seen. But what we do know is that sustained demand from investors is keeping the price high. As more people buy gold to capitalise on this trend, the price of gold is likely to continue to rise.
Is now the right time to invest in gold?
Ultimately, whether it is the right time to invest in gold depends on several factors, including your financial goals and portfolio strategy. However, the current economic climate and market conditions may be a good opportunity to consider gold – especially if you’re looking to diversify your portfolio. But why?
Well, gold has historically served as a hedge against inflation, currency devaluation and economic uncertainty, and this appeal as a safe asset may only increase with the lower interest rates. Another thing to consider is the ongoing demand from central banks 💸, which further cements gold’s value as stable and safe.
With this increased demand, the price of gold is expected to continue to grow, making it a solid choice for investors. So, if you're looking to add a layer of protection to your portfolio, GOLD AVENUE has you covered with a wide selection of pure, investment-grade gold bars and coins.
