The Gold Price Broke New Records

The price of gold jumped to new records earlier this week, rising nearly 3 percent in three days. Gold has mainly been helped by the change in expectations regarding the rate cuts by the Federal Reserve – a 25 percentage point cut was previously considered likely, but now a 50 percentage point cut is more likely.

As of the 18th September the Federal Reserve announced a 1/2 percentage point decrease from 4-3/4 to 5%

This year, the price of gold has already risen to a new record on 35 trading days, the last of which was Monday, when the price of gold ended the day at $2,582.2 an ounce. The intraday record was reached on the same day at $2,589.7 an ounce.

For now, gold has retreated slightly and is trading at $2,571.6 an ounce. The chart below shows how gold has broken through the narrowing channel.

There was also an important breakthrough in euros, since April, the level of 2,275 euros has become an important resistance for gold, and in euros, gold had not exceeded the intraday peaks of April until now. Now, however, the resistance level has been broken and a new technical structure is forming in the euro.

The Fed’s Decision

On the 18th September the Federal Reserve announced an FOMC statement:

“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent.”

While a 25 basis point (25 percentage point) cut in the base rate was considered more likely a few weeks ago, now a 50 basis point cut is widely expected.

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Shifting interest rate cut expectations is one of the main reasons gold has risen to new highs in the short term. Investors fear economic recession more and more, because a number of indicators have warned of a crisis, the labor market is cooling and economic data is weakening in financial markets.

The last time the Federal Reserve cut interest rates was in April 2020, when the world was hit by the corona crisis

After massive money printing and zero interest rates, inflation began to accelerate in 2021, peaking in October 2022 at more than 9 percent year-on-year.

Lowering interest rates makes gold more attractive to investors because it lowers its opportunity cost (forgone income when one investment is chosen over another). In particular, government bonds offer competition to gold – when interest rates fall, the yields on government bonds tend to decrease as well.

What Happens After The Fed’s Decision 

The Federal Reserves decision could allow gold to quickly break above the $2,600 level. Overall, it is very likely that the interest rate decision will bring a relatively large movement to the gold market.

It is quite likely that the Federal Reserve is once again late and the economy is already entering the first phases of the crisis. Jeffrey Gundlach, the founder of DoubleLine Capital, dubbed the “king” of the bond market, also shares this opinion.

“I think there’s going to be a 50 basis point rate cut — they’re already off track,”

he said at the Future Proof conference in California.

“They are late and should finally get their act together.”

He gave a scathing assessment of the Federal Reserve’s actions, giving them an “F” grade, and claimed that an economic depression had already begun in the United States. “We are already in a recession [at least two quarters of recession]. I see a lot of companies announcing layoffs.”

Already in early 2021, Gundlach talked about accelerating inflation and how the Fed’s talk of “temporary” inflation is not true and the central bank should start raising interest rates quickly. However, the Central Bank was late in raising interest rates, starting to raise interest rates only in March 2022. This time too, Gundlach thinks that the central bank is late – but this time by lowering interest rates.

The Price Increase is Expected to Continue

The gold price could reach $2,700 an ounce before the end of the year, with a price target of $2,900 an ounce in the first half of next year. There is a chance the gold price could continue to rise in the long term.

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In addition to falling interest rates, gold is also boosted by very strong physical demand and the fact that Western institutional money has started to flow into the gold market. This is exactly what was missing from the “perfect storm” of the last few years. Investor money flowed into gold-backed exchange-traded funds for the fourth consecutive month in August, the World Gold Council (WGC) reported.

The potential of institutional money is very large, which is characterised by the graph below – 71 percent of fund managers keep only 0-1 percent of the fund’s assets in gold. 27 percent of funds hold 1-5 percent of their assets in gold.