This summer, gold has staged one of the most dramatic rallies in recent years. After hovering in the $1275-$1325 range for most of 2019, the yellow metal quickly shot upward to over $1425 per ounce. In fact, as of this writing, spot gold is at the highest level since Spring 2013! Similarly, the three other major precious metals surged upward. Silver, platinum, and palladium have all posted impressive gains.
As a bullion investor, you may be wondering what caused this sudden spike – and whether it’s the beginning of a new long-term trend. The first question is easier to answer than the second, but both center on the Federal Reserve. This week, the Fed is widely expected to cut interest rates for the first time since 2008. While the exact amount of the adjustment remains to be seen, any reduction in the discount rate would be a significant event. Rate cuts like this are generally issued in groups; rarely if ever are they one-off events.
| There is ample historic precedent for this phenomenon. In 2007, for instance, the Fed cut rates for the first time in three years. What followed was one of the loosest periods of monetary history; the central bank slashed rates 11 more times in a row over the following two years. You may recall that gold also launched upward during that time; spot skyrocketed over 40 percent! The converse is often true too. As the U.S. economy recovered from the financial crisis of 2008-2009, the Fed gradually increased rates 10 times in a row. |
If this rate cut is truly the beginning of a new trend, what does this mean for gold prices in the future? Simply put, low interest rates tend to be extremely bullish for precious metals, as they make owning the U.S. Dollar less attractive. When cash investments aren’t earning as much interest – and the underlying currency loses value – money ends up shifting away from the U.S. Dollar and into gold. For example, the loose monetary policy of 2008-2013 what fueled gold’s all-time highs and record demand. There’s one more intriguing subplot to the Fed’s decision: the whole impetus for the rate cut in the first place. The last time interest rates plunged, the Federal Reserve was engineering a recovery from the “Great Recession.” Granted the American economy is much healthier today, but the expected cut signals a change in attitude towards our country’s financial health. An optimistic view is that the economy is as healthy as it gets – but perhaps the central bank is already detecting signs of a future recession.
|There’s already data to support the latter conclusion. Manufacturing stats are weakening, bond rates are suggesting a pessimistic outlook, and GDP growth has slowed. Although American stock markets remain at or near all-time highs, economists are wondering to what extend this bull market is sustainable.Tax cuts may have powered the advances of 2018-2019, but what will keep stocks at these elevated levels in 2020-2021?|
|While obviously no one has a crystal ball, there are multiple triggers that could push metals prices higher in coming months. This likely rate cut, for example, could be 50 bps instead of 25 bps. The rate cut could be accompanied by dovish commentary suggesting more loosening in the future. A continued deterioration in America’s economic data, trade relations, or political climate could rattle investors and generate volatility in the stock market. Fiscal stimulus is just one potential spark for a gold rally; numerous other factors could create a flight to safety.|
|The remainder of 2019 might be uncertain, but it’s safe to say that the coming months will be interesting for bullion investors. After years of metals trading in a narrow channel, prices are breaking out of their ranges. When the Fed announces the first rate drop in over a decade, gold certainly deserves a fresh look. If this summer rally is any indication, it seems like investors around the world are doing exactly that.|
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