Gold is undergoing a critical examination of investor interest as the Federal Reserve initiates a long-anticipated shift toward rate cuts. Following Wednesday’s announcement by Fed policymakers projecting a 75-basis-point rate reduction next year, the precious metal extended its gains. Investors, anticipating easing due to cooling inflation, had already pushed bullion to a brief record spike last week.
Now, with monetary loosening firmly on the agenda, gold traders are monitoring the potential return of significant investors, which could set the stage for a more sustained rally after two years on the sidelines. Non-interest bearing bullion had been overlooked by big-money investors as inflation-adjusted Treasury yields surged, reaching the highest levels since the financial crisis. This led to persistent outflows from gold-backed exchange-traded funds, acting as a major headwind for the precious metal.
As the Fed signals easing in 2024 and bond yields decline, there is anticipation that this trend might reverse. Marcus Garvey, head of commodities strategy at Macquarie Group Ltd., noted, “The return of an environment that’s conducive to financial inflows for gold is clearly happening. Into next year, I’m still very bullish.”
Despite being just under $100 shy of the recent record set in a tumultuous trading session, investors may exercise caution about entering the market. Gold still maintains a significant premium to real Treasury yields, one of its major drivers, on a historical basis.
This premium has persisted for over a year, fueled by central banks’ record purchases that absorbed sales from investors. Although it seemed poised to close in September as gold prices tumbled, geopolitical events, such as Hamas’s attack on Israel, caused a spike amid short covering.
Gold continues to trade at elevated levels, presenting a high base for prices to rally from. Even a modest resumption in ETF purchases could significantly impact sentiment. Ole Hansen, head of commodity strategy at Saxo Bank A/S, raised the question, “What happens when they both potentially turn buyers next year?”
The pace of the Fed’s rate cuts in the coming year will likely dictate the extent of any new buying. Swaps traders currently price in nearly twice as much easing as signaled by the central bank on Wednesday, possibly leaving gold vulnerable to pullbacks if a cautious approach is taken.
Carsten Menke, an analyst at Julius Baer Group Ltd., commented, “There is no need for a rapid reversal in US monetary policy. We therefore see gold and silver prices on a soft footing.”
Attention will stay focused on US economic data in the coming year, with stronger-than-expected inflation or robust jobs numbers potentially disappointing those anticipating multiple rate cuts. Marcus Garvey from Macquarie concluded, “The market will inevitably face disappointment in terms of the path from here to rate cuts at some point. I imagine we keep having two steps forward, one step back.”
As of 10:14 a.m. in New York, spot gold climbed 0.9% to $2,046.58, with other precious metals also experiencing advances, including spot palladium’s largest intraday jump since March.
