Source: Golden Ten Data
The Federal Reserve's interest rate cut cycle harbors a little-known secret...
The Wells Fargo Investment Research Institute said that there is still room for gold to rise after reaching a record high this year because “changes in the Federal Reserve's interest rate path may become a particularly strong tailwind.”
Analysts at Wells Fargo Investment Research Institute said in an April 15 report that if the Federal Reserve is convinced that the US inflation rate will continue to fall to the 2% target, it may cut interest rates later this year. This is “no secret”, but what is “not well known” is that the strongest performance of gold in the past often appears during the Fed's interest rate cut cycle.” Data from Wells Fargo shows that historically, within 24 months after the Federal Reserve began cutting interest rates, the price of gold rose by an average of 20%.
Since the recently released inflation report was hotter than expected, showing that the US economy remains resilient despite the tightening of monetary policy, traders postponed their expectations of the Federal Reserve's interest rate cut until later this year.
Themes ETFS investment strategist Taylor Krystkowiak said in an interview on Wednesday: Even if “some hopes of the Federal Reserve's policy adjustments have been dashed,” gold may continue to rise if investors continue to hedge against the possibility of a return in inflation. “People will see gold as a way to hedge against the Fed's mistakes,” he added.
The Federal Reserve has kept the policy interest rate high since July last year in order to reduce the inflation rate to the target of 2%. Federal Reserve Chairman Powell said on Tuesday, “Given the strong labor market and anti-inflationary progress so far, we should allow more time for restrictive policies to take effect, and let data and changing prospects guide us.”
According to the latest data from the Chicago Mercantile Exchange's FedWatch tool, federal funds futures show that the Federal Reserve is expected to start cutting interest rates in September. Earlier this year, many traders expected the Federal Reserve to cut interest rates a few times in 2024, but now they only expect to cut interest rates twice.
Wells Fargo analysts said, “We will raise the 2024 gold price forecast to $2,300 to $2,400 an ounce, and raise the 2025 gold price forecast to $2,400 to $2,500 per ounce. However, we suspect that the price of gold may need to take a breather before rising in 2025.”
In March of last year, Robert Minter (Robert Minter), head of ETF investment strategy at European asset management giant Abrdn, said, “Historically, we have seen that suspending interest rate hikes by the Federal Reserve will actually trigger a bullish rebound in gold.” He pointed out that when the Federal Reserve suspended interest rate hikes in 2000, 2006, and 2008, the price of gold rose. As it turns out, the price of gold has been rising since the Federal Reserve suspended interest rate hikes last year.
Wells Fargo analysts said that changes in the Federal Reserve's interest rate path may drive the price of gold higher in the next 6 to 18 months. The report points out that the basic trends currently driving the rise in gold prices include “continued purchases by central banks around the world,” as well as increased consumer demand in emerging markets, “stagnant supply growth,” and escalating geopolitical tension.
They added, “We don't expect these trends to change anytime soon.”
Some investors invest in gold by buying ETFs that track the price of precious metals. As of Wednesday, the SPDR Gold Shares ETF (GLD), the world's largest gold ETF, has risen nearly 15% this year, according to FactSet data.
Meanwhile, Krystkowiak said that gold mining stocks are undervalued.
According to FactSet data, the gold mining-themed ETF (AUMI) rose 1.7% on Wednesday when US stocks fell. This ETF only tracks an index of companies that use gold mining as a source of revenue. Gold mining-themed ETFs have surged 13.6% so far this year, outperforming US stocks. The S&P 500 index (SPX) fell 0.6% on Wednesday, and its year-to-date gains have been reduced to 5.3%.
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