The Federal Reserve’s recent rate cut has drawn renewed attention to gold, a commodity known to benefit from such policy changes. Gold usually rallies when interest rates drop, but what’s different this year is that gold has already been on a strong upward trend. With spot gold jumping nearly 25% in 2024, it’s outperforming both the S&P 500 and Nasdaq Composite, going against the idea that gold becomes less attractive when U.S. Treasury yields are high.
Typically, gold prices go up when interest rates fall because lower rates make this non-yielding asset more appealing compared to investments like Treasurys. For instance, during the Fed’s last rate-cutting cycle in July 2019, gold prices increased by 6% within a few months. However, gold’s strong performance this year suggests that the expected rate-cut rally might already be included in its current price. In fact, gold is nearing the upper limits of 2024 forecasts from major financial players like the BlackRock Investment Institute.
A key factor in this gold rally seems to be a change in demand, especially from global central banks and sovereign wealth funds, unlike the retail investor-driven surges seen in other markets. In the past few years, central banks have significantly increased their gold purchases, doubling their pre-pandemic buying in 2022 and 2023 and keeping up a similar pace in 2024. This strategic move aims to diversify foreign reserves and reduce geopolitical and economic risks. Emerging market central banks now have about 6% of their reserves in gold, while developed countries hold about 12%. This shift is likely an effort to strengthen their currencies and lower dependence on the U.S. dollar, especially amid geopolitical tensions, like the U.S. imposing sanctions on Russia, which have had global banking impacts.
The increased use of dollar-based financial systems for sanctions has led some sovereign wealth funds and central banks to question the safety of holding dollar-denominated assets, prompting a shift toward gold as a more secure option. Lauren Goodwin, an economist at New York Life Investments, notes that this move to gold is part of a broader strategy by countries and institutions to protect against potential U.S. sanctions and other financial pressures.
While central banks have been a major force in driving up gold prices, retail investors have shown mixed interest. Earlier in the year, gold ETFs saw significant outflows, totaling over $800 million by mid-September. However, this trend seems to be reversing, with the SPDR Gold Shares (GLD) ETF recently attracting over $1 billion. If retail investors keep increasing their gold exposure, this could push prices even higher.
From a technical analysis view, there are also signs that gold’s rally might continue. Analysts like Chris Verrone from Strategas remain bullish, with a price target of $2,800 per ounce, about 9% above current levels. Similarly, Robert Minter from Abrdn sees the $2,700 to $2,800 range as a key area for gold, noting that past rate-cut-driven rallies have been bigger than what we’ve seen so far this year.
However, it’s important to remember that some of the biggest gold rallies in previous rate-cutting cycles happened during major economic downturns when gold’s safe-haven appeal was especially strong. Also, Federal Reserve officials have suggested that the so-called neutral rate has increased after the pandemic, meaning yields might stay higher than in the last decade, which could affect gold’s appeal.
While gold’s impressive rise in 2024 has sparked talks about its future direction, several factors support the case for continued strong demand. Central bank buying, strategies to manage geopolitical risk, and changing investor attitudes suggest a potentially sustained interest in gold. Whether this rally goes further or has already accounted for the Federal Reserve’s rate cuts is still uncertain. Still, the trends of 2024 point to a “structural change” in the gold market, hinting at a possible evolution in the traditional link between gold and interest rates.
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