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Expectations that the Federal Reserve will cut its federal funds rate later this year are growing as inflation cools. While many are talking about how that may impact borrowing costs and interest rates on deposits, the impact of federal funds rate changes can go further than that.
Changes to the federal funds rate can cause movement in other areas, like the stock, bond, and precious metals markets. If the Fed does cut its benchmark interest rate, demand for gold could rise – pushing its price higher. And, that would be a welcomed move among gold investors. But why, exactly, could a rate cut cause gold’s price to rise? We asked experts to clarify.
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Why the expected interest rate cut could be good for gold
With inflation cooling, many experts expect the Federal Reserve to cut its federal funds rate. And, that may be good news for gold investors. “Now that a rate cut is almost certain, the effect on gold could be positive,” explains Rick Miller, financial planner and investment advisor at the financial planning firm Miller Investment Management.
Lower rates could spur retail investor demand
As rates begin to fall, gold will have less safe haven competition – which could lead to higher demand and higher prices. “Savers have benefitted from elevated interest rates compared to the decade prior when rates were ultra-low,” explains Noah Damsky, CFA, principal at the financial planning firm, Marina Wealth Advisors.
“Lower rates could spur investor demand since fixed rate instruments will have less attraction, and hence, less competition for investor dollars,” says Miller.
They say we could see a change in the market following the first Fed rate cut.
“Once we get the first rate cut, it will shift sentiment,” says Damsky. “Investors will refocus their attention on when and how frequently the Fed will cut interest rates, not if they will decline. As interest rates decline, you’ll see savers move from bonds back into other asset classes such as gold.”
Tap into gold to prepare for the coming rate cut.
Gold could benefit from higher consumer demand
Lower interest rates could boost borrowing and consumer spending. And, while that could potentially cause inflation to tick up – increasing gold’s demand, it could have a positive impact on gold’s price in another way too.
When consumer spending increases, consumer demand for gold-related goods like jewelry, electronics, and more could tick up. And, that uptick in consumer demand could help support the commodity’s price growth.
The bottom line
If the Federal Reserve does start to cut interest rates soon – as most experts expect it will – the price of gold could head up. After all, as interest rates come down, demand for interest-based safe haven investments like bonds may fall – leaving a safe haven void in many portfolios that gold could fill. And, that could cause gold’s demand – and price – to increase.
At the same time, lower interest rates could spur economic activity and higher consumer demand. After all, with lower borrowing interest rates, consumers may be more likely to buy gold-centric products like jewelry.
Compare your gold investing options before the Fed cuts rates.
Insight:
When interest rates fall, investors typically turn to alternative assets like gold as a hedge against economic uncertainty and inflation. This shift in investor behavior can boost the demand for gold and drive its price up.
