The potential for interest rate cuts in the U.S. has been a major driver of rising Gold prices, which have surged by over 22% since the start of 2024, reaching a new all-time high of $2,531.52 per ounce on August 20th, according to data from ActivTrades. This rally has been further bolstered by ongoing geopolitical tensions in the Middle East and Ukraine.
Surge in Gold Prices Driven by Fed Rate Cut Expectations
The current upswing in Gold prices is largely attributed to growing expectations that the Federal Reserve will begin cutting interest rates in September, with additional cuts anticipated throughout 2024 and into 2025. Investors are increasingly viewing Gold as a safe haven, as evidenced by the rising holdings in the SPDR Gold Trust GLD, the world’s largest Gold-backed ETF, which recently reached a seven-month high.
But why are these rate cut prospects so supportive of Gold prices, and how far could Gold go in 2024?
Market Sentiment and Federal Reserve Actions
According to the CME FedWatch tool, market participants currently estimate a 69.5% probability of a 25 basis point (bps) rate cut in the next Federal Reserve meeting, bringing the federal funds rate down to a range of 5.00% to 5.25%. This marks a slight decrease from earlier estimates, which placed the likelihood at 94.2% in July.
Interestingly, the odds of a more substantial 50 bps rate cut have increased, suggesting a growing belief that the Fed may need to take stronger action to address economic challenges. The Federal Reserve is expected to implement a 25 bps cut at each of the remaining meetings in 2024, with some analysts predicting further cuts into 2025.
Key figures within the Federal Reserve, such as Mary Daly and Neel Kashkari, have hinted at a shift in monetary policy, reflecting growing confidence that inflation is on track to meet the 2% target. However, most economists do not anticipate a rapid series of rate cuts, despite market expectations.
The Interplay Between Interest Rates, Gold, and the US Dollar
Gold, a non-yielding asset, becomes more attractive when interest rates decline, as the opportunity cost of holding it compared to interest-bearing assets like bonds decreases. The relationship between U.S. interest rates, the U.S. dollar, and Gold is complex but significant.
When the Federal Reserve cuts interest rates, it often leads to a weakening of the U.S. dollar. This happens because lower interest rates make U.S.-denominated assets less attractive to foreign investors, reducing demand for the dollar. As the dollar weakens, Gold, which is priced in U.S. dollars, becomes more appealing to foreign investors, leading to an increase in Gold demand.
Earlier this week, the Dollar Index fell to its lowest level since early 2024, further supporting Gold prices.
Future Outlook for Gold in 2024
With Gold prices already at record highs, some analysts see further potential for growth. Aakash Doshi, head of commodities for North America at Citi Research, suggests that Gold could reach $2,600 by the end of 2024 and potentially hit $3,000 per ounce by mid-2025.
In addition to economic factors and U.S. monetary policy, traders should also monitor central bank Gold purchases, which have been on the rise in recent years. Following a record year in 2022 with 1,082 tonnes of Gold purchased, central banks continued to add to their reserves in 2023, acquiring an additional 1,037 tonnes. According to a survey by the World Gold Council, nearly one-third of central banks plan to increase their Gold holdings, suggesting continued support for Gold prices in the near future.
Disclaimer: The information provided is intended for general informational purposes and does not constitute investment research. Past performance is not indicative of future results. Any decisions made based on this information are at the individual’s own risk.
