Golden days for gold; global outlook bullish, price set to go up

The US Federal Reserve's supersized interest rate cut by 50 basis points (bps) or half a percentage point has triggered a robust rally in several commodity baskets, particularly gold,  lifting its demand optimism. The US Fed pivot has resulted in the US dollar and US Treasury yield being inversely proportional to gold prices. Gold prices often follow US Treasury yields because of the inverse relationship between yields and the yellow metal's opportunity cost.

The one-year US bond yield is higher than the 10-year, at 3.98 percent, and the 10-year, at 3.77 percent. When Treasury yields rise, especially in the short term, investors may prefer bonds over gold, a non-yielding asset. However, amid the US Fed rate cuts, gold prices seem to follow the US Treasury yield's movement in direction, inverting their relationship. 

Gold prices stalking US Treasury yields

The fact that the one-year bond yield is higher than the 10-year indicates an inverted yield curve, signalling potential recessionary concerns. This inversion generally leads investors to seek safe havens like gold, supporting higher gold prices as they hedge against economic uncertainty.

Jateen Trivedi of LKP Securities points out, “After the recent Fed rate cut became clear, the US dollar and US Treasury yield remained inversely proportional to gold prices. As long as Fed rate cuts are expected, the trend of an inverse relationship between Treasury yields, the dollar, and gold prices will likely continue.”

An interest rate cut will reduce yields and weaken the US dollar, making the yellow metal more attractive to investors. However, if inflationary pressures or stronger-than-expected economic data emerge, this could temporarily disrupt the trend and pressure gold prices.

‘’A fall in government bond yields increases interest in gold as an alternative to capital preservation, all other things being equal. This inverse correlation worked well last year but has started to fail this year and broke down this week when gold prices and yields started to rise simultaneously. If this is not a sign of a flight from dollar assets, it may be a sign that gold is nearing a peak," Mr Trivedi noted.

The forced liquidation of short positions may push the gold price higher into historical highs, as the US dollar generally holds its ground against a basket of major currencies, and rising bond yields create an unfavourable environment for gold,'' said Alex Kuptsikevich of FxPro.

Gold has jumped 27 percent in 2024, with prolonged conflicts in the Middle East adding to safe-haven demand. Analysts still maintain that price volatility is expected ahead of various US inflation data releases, and traders should watch these levels for potential movements.

‘’While US Treasuries and gold generally share a negative correlation, recent periods of uncertainty—driven by war, economic slowdown, currency instability, an overvalued stock market, and recession fears—have inverted this relationship. China’s economy, despite massive stimulus efforts and rate cuts, is struggling to show significant recovery. The US remains burdened by escalating debt, and inflation is still far from the Fed’s two percent target rate," said Pranay Aggarwal of Stoxkart..

Gold price outlook

In recent months, the focus has shifted to the Federal Reserve’s policies and the outlook for the US economy. Gold thrives as a safe-haven asset in a low-rate environment, particularly amid recessionary fears. Tensions in the Middle East have also contributed to safe-haven demand for gold. COMEX gold looks strong, with a potential target of $2,700 and support near $2,520. 

“Our outlook on gold continues to remain bullish. Globally, countries are moving away from US bonds and into gold and other hard assets. China’s holding of US treasury bonds is at decadal lows, and gold is at an all-time high. We see this trend continuing over the medium term--of selling treasuries and buying gold," said Kunal Mehta of Equirus.

Commodity analysts reckon that with the US presidential election taking place in November, geopolitical tensions and expectations of a further 50 bps rate cut by the US Federal Reserve this year, the outlook for gold remains bullish. The Fed has also hinted at a potential one percent rate cut in 2025. Interest rate cuts typically weaken the dollar and lower bond yields, making gold a more appealing investment.

“ETF and investment flow into gold are increasing, reflecting growing investor confidence. Given this favourable environment, gold could hit $3,000 in the coming months,” said Pranay Aggarwal of Stoxkart.

US Federal Reserve policy verdict

The US Federal Reserve announced its sixth policy decision for 2024 last week. For the first time in four years, it slashed the benchmark interest rate by 50 bps to 4.75 per cent-5 percent, broadly in line with Wall Street estimates.

US Fed policymakers see the benchmark interest rate falling by another half-point (50 bps) by the end of this year, another full percentage point in 2025, and a final half-point reduction in 2026 to end in a 2.75 percent-3 percent range.

The US central bank had maintained the key borrowing rate elevated at the 23-year high for 14 consecutive months since July 2023 to combat the worst inflation outbreak in almost 40 years. 

(By arrangement with livemint.com)