Gold, Silver Extend Downward Correction As Rate Cut Bets Shift

 

Gold and Silver Prices Extend Friday’s Correction Following Fed Chair Powell’s Speech

(Bullion News Network) – Gold’s losses extended this morning. The downward correction began last Friday after inflation readings from the Personal Consumption Expenditures (PCE) index came in lower than expected. The sustained price drop saw gold lose around $20 by Monday afternoon. Silver followed suit, dropping nearly $.50 from its end-of-day price on Friday. The stock market moved similarly toward the beginning of the day. By market close, the Dow Jones index etched out modest gains as the S&P 500 secured a record performance to end Q3. 

Key to the volatile day for markets was Jerome Powell’s speech to the National Association for Business Economics in Nashville, Tennessee. At this speech, Powell was careful to avoid directly signaling the trajectory of monetary policy, reiterating instead that the FOMC is not on a “preset course,” and that rate cuts will vary based on the demands of the U.S. economy. Powell is not committed to aggressively cutting rates at the FOMC’s November meeting, which will happen just two days after the U.S. presidential election. 

Traders Shift Rate Cut Bets After Powell Emphasizes “No Set Course” For Policy Adjustments; Precious Metals Dip 

Traders adjusted their bets on what to expect from this November meeting immediately following Powell’s speech. CME Group’s predictive model FedWatch now anticipates a 62.9% chance that the Fed will opt for a more modest 25 point rate cut after the jumbo 50 bps cut markets enjoyed earlier this month. The stock market stuttered leading up to and during Powell’s speech but recovered later in the day to etch out decent gains. 

Gold and silver markets dropped this morning, extending last week’s downward correction as traders priced in a high likelihood of a more conservative 25 bps cut slated for the Fed’s November meeting. Gold and silver are safe haven assets and have historically performed well during periods of falling interest rates. Today’s correction mirrors increasing uncertainty that the Fed will continue on the potentially inflationary path of consecutive 50 bps rate cuts. 

Adding to gold’s downward pressure is the perceived success of Powell’s attempt at a soft landing. Last week, metals dropped after fresh PCE data showed that inflation had fallen even closer to the Fed’s 2% target in the month of August. Some economists lauded the news as proof that Powell and the FOMC made the right call by acting aggressively to cut rates by 50 bps during the September 18th meeting. 

For gold bulls, the appeal of interest rate cuts relates directly to the potential for large cuts to generate inflationary pressure. Rate cuts tend to lead to higher inflation, which has been a historical boon for precious metals like gold and silver. August’s PCE data provided some assurance to the Federal Reserve, which functionally shouldered the risk of spurring inflation in order to combat a stalling U.S. labor market. 

In reality, it is too soon to tell if the jumbo rate cut will significantly increase inflation. Powell has expressed several times this year that he wants to avoid consecutive bi-directional changes to the target funds rate, but this is exactly what is at stake if the jumbo September rate cut ratchets inflation too high for comfort. It will be several months before the American economy really sees the results of this rate cut. 

#Gold and #silver down again today. Metals dropped last week after a better-than-expected inflation reading.

Markets are now expecting a 25 bps cut at the Fed’s next meeting, which will happen just days after Election Day in the U.S.

Anticipate a rocky market this month.

— Hero Bullion (@HeroBullion) September 30, 2024

Precious Metals Market Outlook – Where Are Gold and Silver Prices Heading? 

Heading into Q4, gold and silver prices are positioned to react to a full slate of economic data reports that will give traders more insight into how the Fed may adjust rates at a pivotal November 7th meeting. Overall, the strongest potential for precious metal prices comes from another jumbo 50 bps rate cut. If the balance of evidence tips interest rate futures back in favor of a 50 point cut, expect more upward momentum from safe haven assets like gold as traders consider the possibility of inflationary risk following a large rate reduction. 

Even if upcoming economic reports suggest a 25 bps cut is imminent, geopolitical stressors and economic anxiety leading up to the U.S. presidential election could drive metal prices higher. Israel’s ongoing conflict with Hezbollah in Lebanon, a war of attrition in Ukraine, and a contentious election in the United States are all stress points that could increase demand for precious metals, including gold and silver. 

All totaled, a variety of conditions will decide where precious metal prices move over the next month. Traders fixated on Jerome Powell and the Federal Reserve to start the trading week, but a combination of geopolitical tensions in the Middle East and economic concerns surrounding the United States presidential race inject even more uncertainty into markets.