As worries about a recession make gold more appealing, it’s not a surprise that gold prices recently hit new highs. This is because people think the Federal Reserve will lower interest rates.
But gold might also be useful as a “all-weather hedge against whatever happens next,” even if the central bank does something odd.
Brien Lundin, editor of Gold Newsletter, told MarketWatch that there has been “some risk from the ‘buy the rumour, sell the news’ phenomenon” when the Fed actually cuts rates or when the day of the decision is very close. But more and more global portfolios are putting money into gold because it “stands to do well if the Fed cuts gradually or it’s forced to lower rates more urgently in a recession.”
Lundin said that gold went up on Thursday even though stocks were down and the dollar was up. It went up even more when stocks went up and the Dollar Index DXY -0.25% went down.
Gold has ‘established itself as the all-weather hedge against whatever happens next.’
Brien Lundin, Gold Newsletter
“I think the lesson is that gold has become the best way to protect yourself from whatever comes next,” he said.
Gold for December delivery GC00 0.99% GCZ24 0.99% went up $30.10, or 1.2%, to settle at $2,610.70 an ounce on Friday. During the day, it hit a record high of $2,614.60 on Comex. This week, prices went up 3.4%, which was the 34th all-time high settlement of the year.
For now, momentum has been the short-term driver of gold prices in western markets as people wait for the U.S. to cut interest rates, said Joe Cavatoni, senior market analyst at the World Gold Council, in an email Thursday afternoon. The Federal Reserve will say what it will do about monetary policy on Wednesday.
As of late Friday morning, the CME FedWatch Tool showed that there was a 57% chance that the central bank would cut rates by 25 basis points next week. It also showed that the chance of a bigger 50-basis-point drop has grown, now standing at 43%. Lower rates can be good for gold that doesn’t pay interest.
Cavatoni believes that the planned rate cuts have caused gold prices to rise, but they haven’t fully been taken into account yet.
“Rate cuts are likely to push prices up in the coming weeks and lead to more demand from investors over a longer period of time,” he said.
Ways that people want gold
Cavatoni said that the World Gold Council has been keeping an eye on “all forms of gold demand” because gold is a global asset. These needs may change now that gold prices are so high.
He said that the trade group has been keeping an eye on the flow of jewellery in Asia to see how well investment demand there holds up. It’s also looking at other things that might be making Western buyers want to buy gold, like how the upcoming election might make things less certain and how gold can be used as a hedge against “immediate event risks.”
Central banks are still a big reason for purchases, which hit 14-year highs in 2022 and 2023. This was “also supported by ongoing concerns about dollar-based assets and inflation,” Cavatoni said.
Traders seem to prefer one type of gold investment over another, even if central banks don’t buy it.
According to Adrian Ash, head of research at BullionVault, the only thing that is happening with gold right now is “speculative trading in derivatives contracts, not physical bullion.”
He told MarketWatch that BullionVault users, who buy and sell gold, silver, platinum, and palladium online, are still making money “net-net,” while coin sellers are still “glutted with used product sold back to them by previous buyers.”
Ash said that trading in the main gold futures contract on the CME derivatives market increased by more than 26% on Thursday compared to the previous daily average for September. Trading in more highly leveraged gold options contracts also increased by 80%. The SPDR Gold Shares exchange-traded fund, which is backed by gold, has grown by 0.9% so far in September.
BullionVault users hold more than $3.6 billion in gold. In the last 24 hours, demand for gold rose 14%, but selling went up 298%, resulting in a “net liquidation” of almost 0.1 metric tonne, he said.
Ash said that investors made money when gold hit its most recent all-time highs in dollars, euros, and U.K. pounds. This is because of “leverage and a lack of fear.” The rise was “way more about next week’s Fed rate cut” than it was about tensions in the Middle East.
Yes, Ash said, “geopolitical violence and tensions are putting a rising floor under gold’s uptrend.” “That’s safe because emerging-market central banks outside of the West are still buying bullion. But right now, these new record prices are being driven by speculation that the Fed will cut interest rates.”
Long-term investors looking for a dip might get the pullback, if not correction, they’re waiting for on Wednesday, the last day of the Fed’s two-day policy meeting. This is true whether the disappointment comes from the central bank’s decision or its new dot-plot forecasts.
