Gold to Shine Brighter After US Fed Rate Cut

The much-anticipated rate cut from the US Federal Reserve has finally arrived. Historically, gold typically outperforms other assets such as equities, currencies, or bonds during these cycles of interest rate reductions in the United States. 
 
Last week, the Fed announced a substantial 50-basis point (bps) reduction in interest rates. Projections suggest another 50-bps cut could be on the horizon for this year alone. Forecasts also indicate potential for an additional 100-bps decrease by 2025 and a further drop of 50 bps in 2026. 
 
Analyses of past U.S. rate-cutting cycles since 1989 reveal that, with exception to the period between '89 and 92, gold prices have consistently risen during these phases. During that particular cycle where rates were reduced from a peak of 9.75% (May '89) to just three percent by September '92, the global spot gold price saw a slight dip, falling about three percent from $362 per ounce to $350 per ounce. 
 
However, subsequent major rate cuts proved highly beneficial for gold investments—notably so during the financial crisis years of '07-'08, when its value surged by an impressive 31 percent following significant drops in interest rates. Similarly fruitful periods occurred from ‘00-‘03 and '19-'20, which both saw increases around twenty-seven and twelve percent, respectively. 
 
Two key factors contributed significantly towards driving up gold prices throughout these last few instances: Firstly, U.S. Treasury yields fell sharply throughout each cycle, important due to their strong inverse correlation with gold prices; hence, lower yields resulted in pricier bullion. 
For example, in response to Treasury yield plummeting from five point one percent all the way down to three point five over the course of ’00-’03’s series reductions, we witnessed a corresponding surge within the market value of gold at approximately twenty-seven percentage points. 
 
Secondly was the undeniable influence of crises occurring during these periods. The dot-com bubble and 9/11 attacks transpired within the '00-'03 cycle, while the Global Financial Crisis unfolded during the '07-'08's. 
 
The question is: Now that another rate cut cycle has begun, could we anticipate a similar crisis? Amit Goel, Co-Founder & Chief Global Strategist at Pace 360, believes there's an "80 percent probability" of the U.S. entering recession within next year, suggesting interest rates could be brought down to just two percent by 2026. 
 
Despite this bold prediction from Mr. Goel, Sachin Jain, Regional CEO for India at the World Gold Council, argues the recent half-point reduction merely indicates the Fed's attempt to preemptively soften potential economic blows rather than signaling an imminent recession. He does, however, concede the possibility of a slowdown on the horizon. 
 
Experts predict a temporary correction before gold prices rise again, with several factors potentially influencing this, including global central bank buying sprees seen last year, which were largely attributed as the cause behind the surge in gold prices. 
Central banks have recently held off purchasing more, but if they re-enter the market once again, increasing the pace at which they acquire reserves, then we may see further upward movement in the gold price, according to Emkay Global Financial Services’ commodity and currency analyst. 
 
Another factor likely to contribute towards future increases would be growing demands from exchange-traded funds (ETFs). Dr. Renisha Chainani, Head Researcher over at Augmont, suggests high ETF demand combined with upcoming festive season physical demands are both variables set to possibly drive up value in the final quarter this year onwards. Furthermore, she adds that additional rate cuts anticipated for 2025 will also likely favorably impact bullion markets next year too.