Gold Rush: $2600 Is Just the Beginning as Markets Brace for Fed Decision

A lot of ink has been spilled regarding the Federal Reserve’s impending rate cut. Getting to this point has been a long and rocky road, and Wednesday’s monetary policy decision marks just the beginning of a new journey.

At the start of the year, markets were pricing in six rate cuts. By March, that expectation had been pared back to two or three, with forecasts bouncing back and forth throughout the summer. Adding to the overall volatility, last month, markets began pricing in the possibility of a 50 basis point move.

The impending rate cut, seen by many as a coin flip, is generating significant optimism in the global marketplace. 

Gold is ending the week at a new record high above $2,600 an ounce, up more than 3% from last week. Silver is experiencing even larger gains, closing the week above $31 an ounce—up nearly 10% from last week.

According to the CME FedWatch Tool, markets see a 45% chance of a more aggressive move next week. It’s hard to see how markets justify this action, as the U.S. economy has held up relatively well, even as activity slows. Meanwhile, inflation remains above the Federal Reserve’s 2% target.

This past week, we saw consumer prices drop more than expected. The August Consumer Price Index rose 2.5%, below the anticipated 2.6% increase and sharply down from July’s 2.9% rise.

However, core inflation, which excludes energy and food prices, increased by 3.2%, slightly up from July’s data. This isn’t exactly the kind of economy that screams for aggressive rate cuts.

Still, as we mentioned last week, it’s less about the destination and more about the journey. This easing cycle is much bigger than just one rate cut. Fixed-income analysts at TD Securities have said they will be paying close attention to the central bank’s interest rate expectations, also known as the dot plots.

"In our view, the dot plot will be the most prominent part of the Fed's guidance next week, along with Chair Powell's post-meeting press conference. Our expectation for the Fed's forward guidance is for it to lean broadly dovish," the analysts said.

While everyone is focused on the Federal Reserve, let’s not forget that they have been the last domino to fall. Other central banks—like the European Central Bank, the Bank of England, the Bank of Canada, and the Swiss National Bank—have already begun their easing cycles. 

This past week, the ECB cut interest rates for the second time, and analysts expect more cuts to come.

As interest rates fall worldwide, global real yields are also moving lower, which is impacting gold prices. This week’s gold rally actually began against the euro, just after the ECB cut rates.

This past week, gold hit record highs against currencies such as the British pound, the Canadian dollar, and the Australian dollar.

We might see some profit-taking next week if a 25 basis point cut disappoints the markets, but for many, gold’s long-term rally is just beginning. 

We haven’t yet witnessed the full impact of the "race to the bottom" in global currency markets as central banks seek to support their slowing economies.

We still have a couple of weeks left in September, but it seems like the seasonal curse has been broken.

This article originally appeared on Kitco News.