After the Federal Reserve cut interest rates by 50 basis points this week to start an easing cycle, spot gold once again broke through $2,600 per ounce on Friday, approaching $2,610 per ounce, continuing to set new historical highs. It has risen by more than 25% so far this year. Spot silver also rose by more than 1% during the day.
Will Rhind, founder of GraniteShares Advisors, which manages a gold ETF, said the start of the Fed's rate-cutting cycle means interest rates are falling and the dollar will begin to weaken. "This is good for gold, and the next catalyst for gold to rise will be if people feel that the economy is heading into a recession and fear emerges, and people need to start buying gold as a hedge," he said.
The Fed expects its benchmark rate to fall another 50 basis points by the end of this year, a full 100 basis points next year and another 50 basis points in 2026.
Alex Ebkarian, chief operating officer of Allegiance Gold, pointed out that "the market is considering larger and more interest rate cuts because the United States has both fiscal and trade deficits, which will further weaken the overall value of the dollar. If you combine geopolitical risks with the current deficit situation, coupled with a low interest rate environment and a weak dollar, all of these factors combined are the reasons for the rebound in gold prices."
“In our view, this rally could go much further. Our target is for gold to reach $2,700/oz by mid-2025. In addition to near-term risk drivers, we expect demand for gold ETFs to accelerate in the coming months,” UBS said in a note.
Meanwhile, UBS added, “We maintain our previous view that silver will benefit from a higher gold price environment.”
While emerging market demand, especially from central banks, Asian consumers and investors, was the main driver of gold's early 2024 gains, the focus in recent months has shifted entirely to the Federal Reserve and the outlook for the U.S. economy. Non-interest-bearing gold typically benefits in a low-interest rate environment, while fears of a recession often prompt investors to turn to gold as a safe haven.
A Bloomberg analysis of six Federal Reserve easing cycles since 1989 shows that gold, U.S. Treasuries and the S&P 500 typically rise as rate cuts begin.
The Fed's rate cuts ended a turbulent period for the gold market, and some analysts pointed out that this will return it to more traditional trading patterns, especially the gold's long-standing negative correlation with real yields. In recent years, this relationship has broken down, and gold prices are at historical highs in an environment of soaring interest rates, mainly supported by huge central bank purchases and surging demand from Asian investors and consumers.
However, in recent months, there have been signs that Western investors are piling back into the gold market as more bets grow on a U.S. Federal Reserve pivot. Holdings of gold ETFs have risen in 10 of the past 12 weeks, while long-only positions in COMEX gold futures hover near their highest level in four years.
Goldman Sachs analysts also mentioned this in their recent reasons for rising gold prices. The bank said that when the Federal Reserve cuts interest rates, capital usually flows into gold ETFs. "We expect the Fed's easing cycle to gradually increase holdings of gold ETFs, thereby boosting gold prices," the analysts wrote.
Goldman Sachs predicts that gold will reach $2,700 by early 2025 as Western capital pours into gold ETFs, central banks continue to hoard the precious metal, and investors seek to hedge against geopolitical conflict and recession risks.
The article is forwarded from: Jinshi Data