The start of a Federal Reserve rate-cutting cycle often coincides with a rally in gold prices, but investors might be surprised to find that the upside has been going all year. On Wednesday, spot gold prices started 2024 up nearly 25%, outperforming the S&P 500 and Nasdaq Composite. The Fed announced a 0.5 percentage point cut in its benchmark interest rate on Wednesday afternoon. XAU= YTD Mountain Gold is outperforming the main U.S. stock index year-to-date. Typically, gold moves inversely to interest rates. The idea is that the yellow metal, which doesn’t yield cash, is less attractive when even safe U.S. Treasuries are offering investors healthy returns. After the Fed’s last non-pandemic rate-cutting cycle began on July 31, 2019, spot gold prices rose 6% between the first cut and year-end. Gold’s performance so far in 2024 raises the question of whether the rate-cutting rally is already priced in. Gold, for example, is already at the upper end of the range of outcomes forecast for 2024 by the BlackRock Investment Institute. But the bullish argument for gold is that there has been a “structural shift” in demand for the yellow metal and that falling rates should bring additional buying, says Robert Minter, director of investment strategy on Abrdn’s ETF team. Central Bank Buying The core of the argument for gold is that the rally so far has largely been fueled by global central banks and other entities such as sovereign wealth funds, rather than retail investors. Central bank gold demand in 2022 and 2023 has been about double what it was before the pandemic, and is heading for similar total purchases this year, according to the World Gold Council. The purchases make sense for some entities as a risk management scenario, even if there is no threat of an “Armageddon” scenario for the U.S. dollar or global financial markets, Minter said. “They’re trying to catch up. Emerging market central banks hold about 6% of their foreign exchange reserves in gold, developed market central banks hold about 12%. So they’re trying to hedge their currencies in case something happens and some kind of monetary policy reset becomes necessary,” Minter said. The U.S. government’s use of the global banking system to enforce economic sanctions, as it has done against Russia since the invasion of Ukraine, is another issue that may have spooked some foreign policymakers. “Using dollar-based systems, including SWIFT, as a weapon has led to more people, particularly more countries — more sovereign wealth funds and central banks — not trusting dollar-based assets as much. That’s a big reason we’re seeing a rise in gold reserves,” said Lauren Goodwin, economist and market strategist at New York Life Investments. ETF Flows While central banks have been pushing gold higher, retail investors have been largely selling this year. Gold ETFs overall have seen net outflows of over $800 million in the year through Sept. 16, according to FactSet. Even the SPDR Gold Shares (GLD) fund had negative year-to-date inflows until recently, but is now posting positive numbers after bringing in more than $1 billion last month. If smaller investors get back into gold, that could give the fund another boost. “We don’t see any change in central buying going forward … and since late June we’ve seen ETF investors move from selling gold on average to buying small amounts of gold,” Minter said. The most popular gold fund so far this year has been another SPDR product, according to FactSet. The Gold MiniShares Trust (GLDM) has seen net inflows of about $900 million. With an expense ratio of 0.1%, GLDM is also cheaper than GLD, which charges a 0.4% fee. The VanEck Merk Gold ETF (OUNZ) and Abrdn Physical Gold Shares ETF (SGOL) are the other funds with net inflows of at least $100 million this year, according to FactSet. Where’s the ceiling? Technical analysts are also seeing positive signs in the gold price chart, suggesting the rally still has room to run. “Gold remains one of the best charts in our work… we’re sticking with our $2,800 target here. Continue to buy dips when the opportunity presents itself,” Chris Verrone, head of technical and macroeconomic research at Strategas, said in a Sept. 16 note to clients. That target is about 9% above Wednesday’s gold price. Minter also identified the $2,700-$2,800 range as the next area to watch for gold, saying that overall rallies following previous rate cuts have so far been larger than the 2024 increase. Certainly, some of these cutting cycles have coincided with major economic recessions, where gold’s defensive properties may have contributed to its better performance. Federal Reserve officials have also said they believe the so-called neutral rate has risen since the Covid pandemic, suggesting that yields could be well above levels seen over the past decade once the cutting cycle is complete.
