The Price of Gold and Stocks Tumbled. Is It Time To Buy?

The Federal Reserve’s press conference on Wednesday surprised investors and sent the price of gold plummeting. Is a good buying opportunity emerging?

The Federal Reserve cut its benchmark interest rate by 25 basis points at its meeting on Wednesday. This was the third consecutive rate cut, and the central bank was very cautious about further cuts.

The decision came as no surprise to anyone. But a subsequent press conference sent almost all markets – including gold – straight down. The central bank announced that it would likely only cut interest rates twice next year. Back in September, the central bank’s committee had planned to cut rates four times in the new year.

The base interest rate was moved to a range of 4.25-4.5 percent at this week’s meeting – bringing the interest rate back to the level it was in December 2022.

The Price of Gold and Stocks Fell Sharply

The announcement of the central bank’s plan for next year caused the price of gold to fall sharply. Previously, more interest rate cuts were planned, and lowering interest rates has a positive effect on gold. Now, with interest rate cuts likely to be fewer than expected, the markets have started to factor this into the price of gold. This led to a very rapid decline.

Gold fell 2.3 percent to $2,584.6 an ounce on Wednesday. Silver fell even more, falling 3.5 percent to $29.4 an ounce. Gold is currently trading 7.4 percent below its record high reached in late October.

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The decline in euros was more modest, with an ounce down 0.9 percent on the day, to 2,498.6 euros. Silver fell 2.2 percent, to 28.35 euros per ounce. The main reason is the strength of the dollar – the American currency strengthened by 1.4 percent against the euro on Wednesday. The dollar also reached its highest level against the euro since 2022.

US stock markets also plunged following the decision. The Dow Jones Industrial Average fell 2.6 percent, the Nasdaq Composite dropped 3.6 percent and the Standard & Poor’s 500 lost 3 percent. The Dow Jones has now fallen for 10 consecutive trading days, the last time it did so in 1974.

Could the Gold Market be Emerging as a Good Buying Opportunity?

Gold is down 7.3 percent from its all-time high in dollar terms and 4.2 percent in euro terms. Given the current fundamentals of the gold market, a 5-10 percent decline could provide a good entry point for a long-term investor in the market.

There could be an expectation that gold could move sideways in the next 1-2 months. If there is no recession or some form of financial crisis in the next six months, I expect that we could see new records and $2,900-3,000 levels in the gold market in the spring.

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However, several economic indicators are pointing to weakness in the US economy. The most important indicator is the inversion of the yield curve. The yield curve has inverted for essentially all maturities of US government bonds.

The inversion of the yield curve has usually been followed by a recession within 6-12 months. You can read more about the inversion of the yield curve and indicators indicating the onset of a recession here.

Economic downturns tend to be accompanied by financial market declines, including a decline in gold prices. If a recession occurs, we could see a break through $2,500 and potentially a return to $2,300. The latter is, in my opinion, low overall, but very likely in the event of a recession.

More Attractive Levels

Given the risk of a recession and the fact that the gold market probably had a local peak at the end of October ($2,790), the graph shows potentially attractive entry points to the gold market. It should be said that timing the market is generally not a good idea, and for a long-term investor, it is usually better to make regular investments (e.g. once a month or quarterly). Therefore, these levels should be taken as useful additional information.

Gold could also bounce off these levels – as we saw with the $2,300 level in July of this year

So as a long-term investor, waiting for these levels may not be the best idea. Overall, I think Wednesday’s decline already presents a good opportunity for investors.

Given the current volatility, however, I think it is quite likely that we will see a revisit of $2,550, which provided support for gold in mid-September, for example – just before the Federal Reserve cut interest rates and gold then surged more than $200 in less than a month. The second time the level provided support was in November, when gold suffered its steepest decline of the year.

There is also a considerable possibility that gold will fall to the $2,480 level, which was initially a barrier (in July and August) and then a platform for further increases (late August and September). As I mentioned above, I currently consider a drop to the $2,300 level unlikely. However, it could easily happen in the event of some kind of financial crisis.

Gold Price in Euros

The dollar may continue to strengthen over the next six months – in which case gold’s declines in euros will also be more modest, as we saw during the November decline and this week. Trump’s policies and the Federal Reserve’s expectation of only cutting interest rates twice next year will likely continue to support the dollar for some time to come.