Traders expect a 99.6% chance of a quarter-point interest rate cut at the upcoming FOMC meeting scheduled for Wednesday, according to data released by CME Group.
In September, the Federal Reserve announced its first rate cut in four years, opting to slash rates by a larger-than-expected half-point, which brought the target rate to 4.75 to 5%.
Gold prices dropped in the short term following the Sept. 19 announcement; however, within days, the yellow metal rallied to make new all-time highs and has since continued its upward trajectory.
Traders are expecting a small interest rate cut on Wednesday at the FOMC meeting. (Source: CME Group)
Since the announcement in September
Lowered interest rates have long been thought by investors to be advantageous to gold as it lowers the “opportunity cost” of owning non-yielding metals as a store of value. As rates become reduced, bonds become less attractive, and as the rate gets closer to 0%, gold’s attractiveness as a store of value increases as it pays no dividends or interest from owning.
“Long-term investors are now interested in holding gold because rates are lower,” said Goldman Sachs Research analyst Lina Thomas. “At the same time, central banks holdings are probably still going to pile up.”
This dynamic has been noticed since the Fed’s decision to make a large interest rate cut in September, which has led to a $167 rise in spot prices, a 6.6% move higher since the announcement.
What’s going on across the globe?
Dovish behavior has been reported across the globe as some investors are speculating the world is entering into an interest rate easing environment, which is often the case during periods of expected economic downturns.
China recently reduced its rate from 3.35% to 3.1%, along with Canada (4.25 to 3.75%), South Africa (8.25 to 8%) and Switzerland (1.25 to 1%).
ETF inflows have soared since the summer as gold prices make new all-time highs. (Source: Bloomberg)
Meanwhile, the World Gold Council reported last week that demand for gold is at all-time highs through the third quarter of this year.
Bloomberg reported ETF demand and bar and coin demand reached the strongest level since Russia’s invasion of Ukraine in February 2022.
World Gold Council Chief Market Strategist John Reade said the U.S. deficit is too large and must be tackled in order to create a stronger economy.
“That’s the primary attraction from the OTC community to increase their gold holdings,” he said.
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