The gold price briefly rose above $2,100/ounce on a spot basis in early December on growing expectations that, with inflation appearing tamed and economic growth tempered, the US Federal Reserve (Fed) would start cutting interest rates as early as March 2024.
However, that view was later dented by the release of data from the world’s largest economy showing stronger than anticipated employment numbers and a pick-up in consumer sentiment, leading prices to retreat below the $2,000 mark.
While many factors affect gold prices, from geopolitics, to currency, and inflation, along with supply and demand, the oft-cited inverse relationship with US interest rates leaves investors constantly on the alert for hints on the Fed’s next move.
Federal Reserve Signals and Gold Prices
Given the broad view on gold’s inverse correlation with interest rates, it is no surprise that investors strive to stay on top of the Fed’s view of the economy and whether it is likely to act by raising or lowering rates. Meeting minutes from the Federal Open Market Committee (FOMC) are eagerly awaited and scoured for clues for future direction; comments from the Federal Reserve chairperson, Jerome Powell, are also dissected, as well illustrated in some of gold’s recent price actions.
Investors also put great store in the CME Fed Watch tool. The tool gives insights into expectations for the Federal Reserve’s target rate, based on 30-Day Fed Fund futures prices, which reflect market expectations of likely changes in US monetary policy, with probabilities for different decisions at upcoming Federal Reserve meetings.
Investor Confidence: Impact of Federal Reserve Actions
Investor confidence, at least in the short run, tends to be affected significantly by Fed actions, regarding interest rates as a reflection of the state of the US economy, its prospects and the broader implications for the global economy. A well-informed view on interest rates helps investors determine whether they want to buy, sell, or hold physical gold or opt for potentially higher-yielding assets.
Fed Rate and Gold: Unraveling the Connection
Gold can sometimes lose its allure in times of rising rates, leaving investors preferring a mix of less volatile assets that might include high-interest money market funds or short-term US Treasury bills, with the converse the case in a low-interest rate environment.
As the central bank’s principal means of tackling inflation and over-exuberant economic growth or the opposite, interest rates form an important part of the landscape for investors. As such, they must be well-versed in the tools available to stay on top of interest rate prospects, while cognisant this will form just one part of the armoury for maximising their portfolio.
Federal Reserve Rate Hike: Implications for Investors
At times of Fed interest rate hikes, investors may consider transferring their money out of gold into higher-yielding assets. This might include real estate or savings as banks raise their rates to attract more deposits.
That said, the event of digitalised gold on the blockchain has offered investors an alternative option to traditional investment, more widely, to earn a monthly yield on their allocated, physical precious metals.
Fed Rate Hike’s Ripple Effect on the Stock Market
Fed interest rate hikes tend to have a negative effect on stock market psychology with sentiment dented by a less conducive backdrop for business.
In a higher interest rate environment, it is harder to secure loans and the cost of borrowing increases, leading in due course to broader cost rises. This in turn will reduce business and revenues for many companies.
In the case of public-listed firms, the subsequent less rosy growth prospects will also have a negative knock-on impact on their share price. If equity prices fall sharply, investors might look at switching money to gold.
Timing Gold Investments: Is Now Opportune?
Confidence had been growing that the Federal Reserve would cut rates earlier than expected in the first quarter of 2024, giving rise to the view that this is the opportune time to invest in gold. US Non-Farm Payrolls rose by a higher-than-expected 199,000 in November which has dented investor confidence somewhat, with gold prices pulling back from the all-time highs seen at the start of December. Nevertheless, though timings may have been pushed back, markets remain confident that rates have peaked and will decline in the first half of next year.
Gold’s Dance with the Federal Reserve
Moves or even just anticipated moves by the Federal Reserve will continue to play a key role in determining the gold price, with investors using all available resources to scout for clues that might give them a heads-up on interest rates.
But while the precious metal’s inverse relationship with rates is important, investors must always remain cognisant at all times of other, often inter-connected, factors, including the US dollar, inflation, and geopolitical developments, if they are to optimise their portfolio.
Citations
Karen has a distinguished career spanning over three decades in the precious metals industry. She dedicated 11 years of her career as an analyst at the globally acclaimed precious metals consultancy, GFMS, a subsidiary of the London Stock Exchange Group.
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