Expert analysis: Should you increase exposure to gold as US Fed rate cut pushes prices near record high?

US Fed rate cut: Gold prices are hovering near all-time highs as excitement builds over a possible US Federal Reserve rate cut on Wednesday, September 18. The prospect of a weaker dollar, driven by anticipated rate reductions, has sparked renewed interest in gold, which thrives as a safe-haven asset during times of currency depreciation and economic uncertainty.

Spot gold prices in India have risen about 16 per cent this year. In comparison, international gold prices have gained over 24 per cent, driven by a combination of factors, including expectations of rate cuts, leading to safe-haven appeal in gold, central bank buying, uncertainty about US elections, escalating geopolitical tensions, and investments through exchange-traded funds (ETFs).

At this juncture, there are hopes that the US Fed will pursue an aggressive rate reduction this year, which would augur well for gold prices globally. Gold is priced in dollars globally, and when rates are cut, the dollar weakens, making gold cheaper in other currencies and increasing demand.

However, the rate cut is not the only trigger influencing gold prices. Geopolitical tensions, news flow around the upcoming US presidential election, gold-buying by central banks, and inflow into gold ETFs will remain critical factors for gold prices.

Time to buy more gold?

Mint sought insights from several experts on how a potential US Fed rate cut could impact gold prices, the key challenges ahead, and whether now is the right time to increase exposure to the yellow metal. Take a look:

Anindya Banerjee, SVP and Head of Currency, Commodity and Interest Rates, Kotak Securities

With expectations of a rate cut, gold could benefit from a weaker dollar and declining yields, enhancing its appeal as a safe-haven asset.

However, several current challenges could dampen this optimism. A more hawkish tone from the Fed could scale back the extent of future rate cuts, limiting gold’s upside potential.

Additionally, weak economic data from China, a key driver of global demand, may weigh on broader market sentiment.

Any sudden rebound in the US dollar or rising bond yields, driven by unexpected macroeconomic factors, could further curtail gold’s rally in the short term.

However, over an 18 to 24-month cycle, gold and silver could present a strong investment opportunity.

“The Fed and other central banks are expected to significantly lower interest rates during this period, likely weakening their currencies against bullion. This makes gold and silver a sensible diversification strategy in a well-rounded portfolio,” said Banerjee.

Ajay Garg, Director & CEO, SMC Global Securities

The US Federal Reserve is preparing for its first rate cut in over four years, and the financial world is watching closely.

While a 25 basis point cut seems likely, there’s still a chance the Fed might go for a more aggressive 50 basis point move.

With inflation cooling, job growth slowing, and the economy holding steady, the timing feels right.

“This is a crucial opportunity for gold investors. Rate cuts weaken the dollar and lower bond yields, making gold more attractive. Gold has already surged 25 per cent in 2024, outperforming other assets, and could climb even further, possibly hitting $2,700 per ounce,” said Garg.

“But it’s not all smooth sailing. After the cut or uncertainty around the US election, a stronger dollar could dampen gold’s appeal, especially for overseas investors,” Garg added.

Naveen Mathur, Director – Commodities & Currencies, Anand Rathi Shares and Stock Brokers

Since the start of the year’s second half, speculative flows from Western investors have continued to drive prices to all-time highs, and physical demand from top consumers, including India and China, has dried at current levels since last month.

This is evident from the discount persisting in Shanghai Gold Exchange prices to the LBMA benchmark.

It could remain a challenge to global prices till the end of the year. Also, speculative longs on COMEX are at the highest levels since 2016, which may unwind quickly on profit booking moves in case the US Fed resorts to lesser rate cuts as anticipated by market participants this year.

“We still anticipate a corrective move in gold prices by 4 – 8 per cent to around $2,400 – 2,450 per oz before the end of the year, which could be a good accumulation level for investors looking to increase their exposure to gold,” said Mathur.

“Meanwhile, strong investor confidence and underlying demand with the start of a lower interest rate regime could still drive gold prices to unprecedented levels in coming years, where even further 12 – 15 per cent returns in gold in 2025 as compared to 2024 cannot be ruled out. We expect spot gold to average around $2,600 – 2,650 per oz in 2025, compared to the year-to-date average of $2,280 per oz in 2024,” Mathur said.

Chakravarthy V., Cofounder and Director, Prime Wealth Finserv

Geopolitical tensions and persistent inflation concerns have kept gold’s safe-haven status intact.

With central banks, particularly in emerging markets, purchasing more gold to diversify reserves, the demand is expected to remain strong.

Given the current economic landscape and potential interest rate cuts, gold prices may reach $2,640 to $2,660 per troy ounce soon.

With inflation remaining sticky, gold could remain a protective asset against economic uncertainties.

However, while an initial rate cut could boost gold prices, a stronger economic recovery and rising real interest rates could diminish its appeal as a non-yielding asset.

If geopolitical tensions ease or market conditions stabilize, the safe-haven demand for gold could decrease, leading to a potential price correction.

Any change in central bank gold purchasing trends could impact demand and prices.

“Increasing exposure to gold could be beneficial in the current environment, especially for those with a long-term horizon. However, being mindful of potential challenges, such as changes in interest rates and market stability, is crucial for managing risks effectively,” said Chakravarthy.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.