The start of the Fed's rate-cutting cycle often coincides with gold's rise, but investors may be surprised to learn that gold's upward trend has continued all year long. Spot gold rose nearly 25% in 2024 on Wednesday, outpacing the S&P 500 and Nasdaq. The Fed is widely expected to lower its benchmark interest rate later in the afternoon, but markets remain divided over the extent of the cut. XAU= YTD mountain Gold has outperformed major U.S. stock indexes year-to-date. Typically, gold moves inversely to interest rates. The idea is that when even safe U.S. Treasuries offer investors healthy yields, the yellow metal, which doesn't bring in cash, becomes less attractive. After the Federal Reserve's last non-epidemic interest rate cut cycle began on July 31, 2019, spot gold rose by 6% between the first interest rate cut and the end of the year. Gold's performance so far in 2024 raises the question of whether a rate cut rally is already priced in. But Robert Minter, director of investment strategy for the Abrdn ETF team, said the optimistic view on gold is that there have been “structural changes” in demand for gold, and falling interest rates should bring more buying. The crux of the central bank buying gold debate is that gold price gains so far have been driven primarily by other entities such as global central banks and sovereign wealth funds, rather than retail investors. According to data from the World Gold Council, gold demand from central banks in 2022 and 2023 will be approximately double pre-pandemic levels, and total purchases this year will be close to similar levels. Minter said even without an “apocalyptic” scenario for the U.S. dollar or global financial markets, these purchases would make sense for some entities as a risk management option. “They are catching up. Emerging market central banks have about 6% of their foreign exchange reserves in gold, compared with about 12% in developed markets. So they are trying to make their currencies strong.” If anything happens, they need to A currency reset of sorts,” Minter said. The U.S. government's use of the global banking system to impose economic sanctions, like those it has imposed on Russia since its invasion of Ukraine, is another issue that may unsettle some foreign policymakers. “The weaponization of dollar-based systems, including SWIFT, has led to more people, and especially more countries—more sovereign wealth funds and central banks—to trust dollar-based assets less. .ETF Flows As central banks have been raising gold prices, small and medium-sized investors have been selling gold for most of this year. As of September 16, gold ETFs as a whole have experienced net outflows of more than $800 million. Minter said: “We don't see any change in central buying going forward… As of the end of June, we started to see ETF investors selling from the average.” Gold turns to buying small amounts of gold. The most popular gold fund so far this year is another SPDR product, according to FactSet. The Gold Mini-Cap Trust (GLDM) has seen net inflows of about $900 million. GLDM's expense ratio of 0.1% is also better than GLD's Fees are cheap at 0.4%. The VanEck Merk Gold ETF (OUNZ) and the Abrdn Physical Gold Shares ETF (SGOL) are the other funds with at least $100 million in net inflows this year. Where is the ceiling for gold prices, too? There are positive signs in the charts that the rally may have room to go, Chris Verrone, director of technical and macro research at Strategas, said in a note to clients on September 16, “Gold remains one of the best charts we work on… Stick with our $2800 target and continue to buy pullbacks whenever possible. This target is about 9% higher than where gold traded on Wednesday. Minter also identified the $2,700 to $2,800 range as the next area to watch. To be sure, some of these cuts coincide with major economic downturns, in which gold's defensive qualities may help improve its performance, Fed officials said. , they argue that so-called neutral rates have risen since the coronavirus pandemic, suggesting that once the rate-cutting cycle is complete, yields may remain well above levels of the past decade.
Gold has rallied ahead of Fed rate cuts. Why there could still be more upside
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