Market Analysis: Gold Continues To Gain On Geopolitical Risk, Dovish Federal Reserve

 

Geopolitical Risk and U.S. Rate Cut Push Gold Prices Higher

(Bullion News Network) – Gold continued its historic price run this morning, adding $8 to yesterday’s spot price and hovering near the fresh all-time high of $2,630. Two factors are behind rising gold prices. First, a larger-than-expected 50 bps rate cut from the Federal Reserve last Wednesday drove a late-week price run for gold, which has historically performed well during periods of falling interest rates. Geopolitical risk has also influenced gold prices, as heightened tensions and a renewed offensive in the Israel-Hezbollah war drove gold to a new all-time high last Friday. 

The effect of last week’s surprise rate cut was delayed, with gold prices dropping on the day before recovering and gaining ground on Thursday and Friday. Questions still linger concerning what this decision signals for Fed Chair Powell’s confidence in the U.S. economy. Cutting interest rates is generally considered an inflationary action, and some analysts view the FOMC’s jumbo rate cut as a calculated gambit that could improve the stalling U.S. job market at the cost of higher consumer prices.

Other commentators agree with Powell’s position, which is that inflation has fallen to a low enough level that an aggressive rate cut is a sign of strength rather than weakness. The Federal Reserve’s dual mandate is to secure maximum employment and minimal inflation. Powell’s messaging matters; markets reacted with volatility as he spoke at a press conference following the FOMC meeting, erasing much of the gains logged in stock and metal markets in the moments after the Fed’s 50 bps cut was confirmed. The Fed Chair reiterated at this press conference his belief that the large rate cut is appropriate, given the upside risks to inflation and downside risks to unemployment: 

What we say is, as the risks, the upside risks to inflation have really come down, the downside risks to employment have increased and because we have been patient and held our fire on cutting while– while inflation has come down, I think we’re now in a very good position to manage the risks to both of our goals.

Geopolitical risk, particularly in the Middle East, also continues to drive gold prices to record heights. Israel ramped up its war with Lebanon-based Hezbollah last week, executing a series of late-night bombing runs and reportedly taking out a prominent Hezbollah commander. An intensifying conflict between Israel and Hezbollah threatens reasonable stability, which boosts demand for safe haven assets like gold, silver, and platinum. 

Market Analysis: What to Expect From Gold Prices in Q4 2024

Where does this leave the gold market? Traders should expect volatile gold price action, experts say, as markets react to a wide range of domestic and international stressors. Where the Fed is concerned, market analysts are still debating whether Powell’s jumbo rate cut is a sign of confidence in a soft landing or a signal that the labor market is heading for a cliff. It is also worth noting that, in both 2001 and 2007, recessions directly followed the Fed’s decision to cut rates by 50 basis points. 

The risk of a recession would be a boon for safe haven assets, including gold. If the Fed is able to stick the soft landing, market demand for inflation safeguards like gold should decrease. On the other hand, a falling stock market, a hike in unemployment, or reignited inflationary conditions could would likely increase the value of risk-resistant assets, including gold and silver.

Domestic and international stressors will also have a major impact on metal prices heading into Q4.

Check out our latest post, where we talk about the newest #gold all-time high.

“The downside risk to supply chains posed by a protracted Israel-Hezbollah war also offers tailwinds to gold price action jolted by a dovish Federal Reserve.”https://t.co/hEm5ZaxI7B

— Hero Bullion (@HeroBullion) September 20, 2024

Less than fifty days remain until a contentious U.S. presidential election between former President Donald Trump and Vice President Kamala Harris. The outcome of this election should impact all American markets, especially considering Mr. Trump’s controversial proposal for a universal 10% tariff, a policy with potential effects that are hotly debated among economists. Concerns over government spending, inflation reduction, and military budgets have taken center-stage since President Biden ceded the nomination to Vice President Harris, so expect markets to react quickly as traders reconsider their positions after election day. 

In the near to long term, the ongoing conflicts between Israel, Palestine, and Hezbollah will continue to inject uncertainty into markets. Gold, which has traditionally performed well during periods of geopolitical instability and heightened tensions, jumped last week after a series of offensives on Hezbollah by the Israel Defense Forces (IDF). As these conflicts threaten stability in the entire region, traders will likely watch outcomes closely for cues on the future appeal of safe haven assets, including gold.

In other words, volatility is likely for the next month of precious metals market price action as traders respond to a combination of economic and geopolitical stressors. The longer term direction of gold’s price action should be clearer once markets receive more economic data starting next month.