Gold’s Rally in Response to Federal Reserve Rate Cuts
The Federal Reserve’s decision to cut interest rates often triggers a rally in the price of gold, as investors seek out the precious metal as a safe-haven asset. However, in 2024, the upward trend in gold prices started much earlier in the year, with spot gold already up nearly 25%. This outperformance of gold compared to the S & P 500 and Nasdaq Composite indices raises the question of whether the rate-cut rally is already priced in.
Structural Change in Gold Demand
Despite the impressive performance of gold so far this year, some experts believe that there has been a “structural change” in demand for the yellow metal. Falling interest rates should bring in additional buying, according to Robert Minter, director of investment strategy at Abrdn. This shift in demand could potentially fuel further gains in gold prices.
Central Bank Buying and Geopolitical Factors
One key driver behind the rally in gold prices has been the increased buying from global central banks and other entities like sovereign wealth funds. Central bank gold demand has surged in recent years, with purchases doubling their pre-pandemic levels. These entities are bolstering their reserves with gold as a risk management strategy, particularly in light of geopolitical tensions and the potential impact of economic sanctions enforced by the United States.
ETF Flows and Investor Sentiment
While central banks are ramping up their purchases of gold, smaller investors have been selling off their holdings for much of the year. Gold ETFs experienced net outflows totaling more than $800 million through mid-September. However, there are signs that sentiment is shifting, with ETF investors starting to show interest in gold once again. This renewed demand from smaller investors could provide further support for gold prices.
Where’s the Ceiling for Gold Prices?
Technical analysts are also bullish on the outlook for gold, with some predicting that the rally may have more room to run. Targets for gold prices range from $2,700 to $2,800, representing further potential upside. Historically, total rallies following previous rate-cutting cycles have been larger than the current rise in gold prices, suggesting that there could be more gains ahead.
In conclusion, while the start of a Federal Reserve rate-cutting cycle typically boosts gold prices, the ongoing rally in 2024 has been driven by a combination of factors, including changing demand dynamics, central bank buying, and shifting investor sentiment. Despite the potential for further gains, uncertainties remain, and investors should carefully monitor key levels and market developments to gauge the future trajectory of gold prices.
