Gold Prices Skyrocket After Fed Rate Cuts: Could $2,700 Be the Next Target?
As central banks buy up gold and global uncertainties rise, the precious metal pushes toward new highs. Here's why investors should keep their eyes on $2,700 | That's TradingNEWS
Gold Surges Amid U.S. Federal Reserve Rate Cuts and Market Uncertainty
Recent Price Movement of Gold
The price of Gold has seen significant fluctuations in the Philippines recently, reflecting broader global market movements. On Thursday, gold prices in the Philippines increased to PHP 4,584.07 per gram, up from PHP 4,575.44 on Wednesday. Additionally, the price of gold per tola rose to PHP 53,467.68, marking an uptick from PHP 53,366.54 the previous day.
Gold’s rising prices are not unique to the Philippines; the trend is consistent globally. In U.S. markets, spot gold reached a new high of $2,600.11 per ounce on Wednesday before closing slightly lower at $2,559.15. Gold futures also showed strength, although they ended the day down 0.6% at $2,582.90 per ounce.
Impact of Federal Reserve Interest Rate Cuts
The Federal Reserve’s aggressive monetary easing, with a 50-basis point rate cut, has had a significant impact on gold prices. This move lowered the benchmark policy rate to 4.75%-5%, which spurred a rally in gold due to the weakening U.S. dollar and declining bond yields. Historically, gold thrives in low-rate environments, and this time is no different. The precious metal surged as the rate cut became imminent, and many market participants believe that the Fed's move signals further rate reductions in the future.
According to recent market data, the Federal Reserve is expected to lower interest rates by another 50 basis points before the end of the year. This projection, combined with a 100-basis point cut forecasted for 2025, bodes well for gold's outlook as it thrives in environments where the U.S. dollar weakens and real yields fall.
Record Highs and Central Bank Buying
Gold has hit record highs multiple times in 2024, and it's important to highlight the role of central bank purchases and geopolitical tensions. Central banks from Asia, including those in Russia and China, have been aggressively increasing their gold reserves, which has further boosted demand. Central bank buying has been one of the most prominent drivers for gold this year, as countries look to diversify away from the U.S. dollar amidst ongoing geopolitical tensions and economic uncertainties.
Meanwhile, geopolitical risks, particularly in Eastern Europe and rising tensions between Russia and Western nations, have added to gold’s appeal as a safe-haven asset. These risks have driven both institutional and retail investors towards gold as a hedge against potential market shocks.
The Fed’s Role in Gold’s Surge
The Federal Reserve's actions over the past year have been key drivers in the rise of gold prices. While rates were held at a two-decade high, the pivot towards easing signaled a bullish outlook for the precious metal. Historically, when the Fed embarks on a rate-cutting cycle, gold and U.S. Treasuries tend to rally together. In particular, the Fed's decision to cut rates by 50 basis points earlier this week, along with indications of further easing, is providing ongoing support to gold.
The market expects another half-percentage point cut by the Fed before the year ends, which is being priced in as a positive for gold prices. This has resulted in a 24% increase in gold prices over the past six months, driven by expectations of lower interest rates and higher inflation over the longer term.
Gold's Relationship with Bond Yields and the U.S. Dollar
Gold's recent rally can also be attributed to its inverse relationship with U.S. Treasury bond yields. As the yield on the 10-year Treasury fell to 3.62%, investors shifted towards gold. The dollar's weakness, particularly following the Fed’s monetary policy, further supported gold’s upward movement. The U.S. Dollar Index (DXY) fell to its lowest levels since July 2023, retreating to 100.4 before settling at 100.7.
This decline in the U.S. dollar has been crucial in boosting gold prices, as a weaker dollar makes gold more attractive to foreign buyers. In contrast, higher bond yields generally dampen gold's appeal, but with yields on the decline due to the rate cuts, gold continues to shine as a preferred store of value.
Global Economic Concerns and ETF Inflows
As global economic uncertainties persist, gold-backed ETFs have seen a surge in inflows. In fact, holdings in gold-backed ETFs have risen for 10 of the past 12 weeks, indicating a growing interest from institutional investors. This uptick in ETF demand is largely driven by fears of inflation, recession concerns, and expectations of further monetary easing.
Analysts are also predicting that gold prices could rise further, with UBS projecting a price target of $2,700 per ounce by mid-2025. Given the current macroeconomic conditions, this outlook is shared by other market watchers who see gold as an essential asset in portfolios during times of high volatility.
Insider Transactions and Central Bank Activity
The surge in gold prices has also drawn attention to insider transactions, particularly in the mining and precious metals sectors. Central banks globally, including in China, have been increasing their gold reserves aggressively. This comes as no surprise given that gold is seen as a hedge against geopolitical risks and inflationary pressures. Additionally, central banks are moving away from dollar-denominated assets, and gold offers an alternative that is both tangible and resilient.
Technical Analysis and Future Outlook
From a technical perspective, gold prices are facing strong resistance near the $2,600 per ounce level, which will be crucial to watch in the coming sessions. Should prices break above this psychological barrier, there is a strong case for further gains towards $2,700 per ounce, especially if geopolitical risks escalate or inflationary pressures rise.
However, short-term pullbacks are likely as the market consolidates around these key levels. Support is seen around the $2,530 per ounce level, which has been a crucial area for gold's price action in recent months. Investors may see any dip towards these levels as a buying opportunity given the broader macroeconomic backdrop.
Conclusion – Is Gold a Buy, Hold, or Sell?
Given the ongoing monetary easing, geopolitical tensions, and the weakness of the U.S. dollar, gold remains a strong buy for investors looking to hedge against uncertainty. The confluence of factors including central bank buying, ETF inflows, and macroeconomic risks continue to make gold an attractive asset for long-term portfolios. The current bullish trend shows no signs of abating, with the potential for further price appreciation towards $2,700 per ounce in the medium term. While volatility may present short-term opportunities, the fundamentals suggest gold will continue to outperform in the current environment.
