The Fed Can’t Save You, but Gold Will

Growing market expectations that the Federal Reserve will aggressively lower interest rates this week are supporting gold prices, which remain near their recent record highs above $2,600 an ounce. Looking beyond the central bank’s first move in a new easing cycle, one bank expects gold to gain further momentum.

In their latest note on gold, Soni Kumari, Commodity Strategist, and Daniel Hynes, Senior Commodity Strategist at ANZ, stated that gold’s technical break above $2,550 an ounce should continue to attract bullish investor attention as the Federal Reserve prepares to lower interest rates.

The analysts anticipate gold prices rising to $2,900 an ounce by the end of next year, driven by renewed investment demand, which had been a disappointing pillar of support in the first half of 2024.

"Falling real rates and a weakening USD will likely strengthen their inverse relationship with gold during the upcoming easing cycle. This will boost investment demand as the opportunity cost of holding gold declines. We expect a recovery in strategic investments in gold, pushing prices higher," the analysts said.

These comments come as markets anticipate the Federal Reserve to aggressively cut interest rates on Wednesday. According to the CME FedWatch Tool, markets see a 65% chance of a 50-basis point cut. However, many analysts have noted that these expectations may be too aggressive, with most economists predicting a 25-basis point move and dovish signals for further rate cuts through 2025.

Kumari and Hynes emphasized that investors should focus on the overall path of interest rates rather than a single rate cut.

"A 100-basis point cut could lead to 200–250 tonnes of net inflows into exchange-traded funds (ETFs) over the coming months,” the analysts suggested. “The anticipated 200-basis point cuts throughout this cycle have the potential to raise inflows by 500 tonnes."

In addition to impending rate cuts, ANZ remains bullish on gold as central banks continue increasing their exposure to the yellow metal. The analysts said they don’t expect higher prices to deter central bank purchases.

“We have raised our estimates of central bank buying to 950 tonnes in 2024 and 850 tonnes in 2025. These volumes are lower than the last two years but still relatively high,” they said.

However, ANZ also warned investors that the gold market could experience some near-term volatility.

“While strategic investment in ETFs could act as a structural driver to lift gold prices, speculative positions look stretched, with shorts nearly covered and longs near 2020 levels. Crowded positions are likely to create a headwind for the price in the short term,” they explained.

Despite these near-term risks, the strategists noted that gold retains solid momentum.

“We expect prices to move towards the USD 2,640–2,650/oz range soon, as long as prices stay above USD 2,550/oz. However, if prices fall below USD 2,540/oz, it would suggest that this breakout was a false signal. In that case, technical selling could occur amid a rush for profit-taking following the recent price rise, and prices could fall back to the next support level at USD 2,460/oz,” the analysts concluded.

This article originally appeared on Kitco News.