Gold price movement: Fed action impact & what history suggests in a falling rate regime?

Gold investors will have their eyes fixed on Federal Open Market Committee (FOMC) meeting outcome on Wednesday in anticipation that US Federal Reserve blinks on interest rate or at least hints at the timing of the cut at a time when the European Central Bank (ECB) and Bank of Canada have already taken the lead by slashing policy rate by 25 bps.

The non-yielding yellow metal benefits from a low interest rate regime and historically, gold has risen in periods of rate cuts. Over the last two decades, gold has consistently delivered positive returns during periods of interest rate cuts.

Gold and interest rates typically have an inverse relationship and price tends to rise when interest rates fall and go down when they increase, Anuj Gupta, Head Commodity & Currency, HDFC Securities said. Explaining the connection, Gupta said that between the 2000 and 2003 period when interest rates fell from 6.50% to 1%, gold prices rose by almost 53%. Likewise, between 2007 and 2008, when the Fed shifted its policy stance from hawkish to dovish, gold delivered an almost 29% return.

In the period between 2008 and 2011, when the stance turned “ultra-dovish” to combat the economic slowdown, gold prices skyrocketed by 152%, the HDFC Securities analyst said.

Analyst Naveen Mathur goes even further highlighting how in the last eight Interest rate easing cycles starting June 1974, gold prices have moved up 6 times while dragging down only twice. “On an average, rate cutting-cycles have lasted 23 months,” he said. In contrast, there have been more than 10 rate hiking cycles since 1974 which have averaged more than 12 months, Mathur said, adding that gold has been seen as a more favourable asset class during the cutting cycle and surprisingly it had also performed well in some hiking cycles as other factors like high oil prices, inflation etc have played a role in the golden performance of this bullion metal.In 2024, so far gold’s returns have been to the tune of 13% and nearly double from returns delivered by headline indices S&P BSE Sensex and Nifty 50. In rupee terms the price of yellow metal has appreciated by Rs 8,248 per 10 gram. However, in June, prices have cooled-off from the highs of Rs 74,777, a 4.3% or Rs 3,200 per 10 gram decline. On the month-to-date basis, they are down by 0.53% or Rs 383.

While ECB’s rate cut triggered the price, the China jolt next day took some sheen off the metal. Its central bank People’s Bank of China (PBOC) stopped gold purchases to its reserves in May after 18 months of consecutive purchases, official data revealed. The decision was made after PBOC found gold prices too steep to buy.

In April the purchase fell by 30% month-on-month.

Also Read: Gold Price Today: China pulls plug on buying, yellow metal plunges Rs 1,200/10 gram, silver by Rs 3,300/kg

Not just the China factor, the US May non-farm payroll data was better than estimated which dashed hopes for an early rate cut scenario, weakening gold’s prospects.

Mathur expects a further 3–4 % cooling-off in prices in the coming sessions as a result of Fed commentary.

Outlook

Gold’s growing appeal has been on continued demand from global central banks, geo-political tensions and strong consumption trends.

Sharp moves seen in the last 2 months have been overly speculative as we anticipate volatility with corrective bias in prices to continue in the near term, Mathur said while conceding that the long term fundamentals still favour bullion.

Investors can look to buy gold on dips of 4–5%.

While Gupta sees a dilemma sticking with the Fed due to the combination of mixed macro data and firm inflation in the current circumstances, he sees more correction in the short term.

“We anticipate gold prices in the international markets to come down towards $2,217–$2,180 once they break the support of $2,275. Resistance is seen at $2,335-$2,388,” Gupta said.

As for MCX August gold futures, support is seen at Rs 70,080 and a fall below this level could drag it to Rs 68,600, the HDFC Securities analyst said recommending short-term traders to adopt a sell-on-rally strategy.

And for investors, a correction is a good buying opportunity, he added.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)