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Gold price trends: What are the implications of Federal Reserve actions and history in a declining interest rate regime?

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Gold investors will be closely watching the outcome of the Federal Open Market Committee (FOMC) meeting on Wednesday in anticipation of the US Federal Reserve (Fed) keeping a close eye on interest rates, or at least signalling the timing of a rate cut, with the European Central Bank (ECB) and the Bank of Canada already leading the way by cutting their policy rates by 25 basis points.

Gold, which does not offer a yield, benefits from a low interest rate regime and historically gold has risen during periods of lower interest rates. Over the past two decades, gold has consistently delivered positive returns during periods of lower interest rates.

Gold and interest rates are typically inversely correlated, meaning prices rise when interest rates fall and fall when interest rates rise, said Anuj Gupta, head of commodities and currencies at HDFC Securities. Explaining this relationship, Gupta said gold prices rose nearly 53% between 2000 and 2003, when interest rates fell from 6.50% to 1%. Similarly, between 2007 and 2008, when the Fed shifted its policy stance from hawkish to dovish, gold delivered a return of about 29%.

According to analysts at HDFC Securities, gold prices surged 152% between 2008 and 2011, when the market turned “ultra-dovish” to counter an economic slowdown.

Analyst Naveen Mathur goes further, highlighting that in the past eight interest rate easing cycles starting from June 1974, gold prices have risen six times and fallen only twice. “On average, interest rate cut cycles lasted 23 months,” he said. In contrast, since 1974, there have been more than 10 interest rate hike cycles that lasted more than 12 months on average, Mathur said, adding that gold is considered a more preferred asset class during interest rate cut cycles and has surprisingly performed well in several interest rate hike cycles as other factors such as high crude oil prices, inflation have impacted the bullion metal’s performance. So far in 2024, gold has returned 13%, almost double the performance of the leading indexes S&P BSE Sensex and Nifty 50. In rupee terms, gold prices have risen to Rs 8,248 per 10 grams. However, prices have settled down from a high of Rs 74,777 in June, down 4.3%, or Rs 3,200 per 10 grams. It has fallen 0.53%, or 383 rupees, so far this month.

The ECB’s rate cut triggered a rise in gold prices, but a sharp sell-off in China the following day took the luster out of the metal. The central bank, the People’s Bank of China (PBOC), stopped buying gold for its gold reserves in May after 18 consecutive months of purchases, according to official data. The decision came after the PBOC deemed gold prices too high to justify its purchases.

Purchases in April were down 30% from the previous month.

Related article: Gold price today: China stops purchases, gold plummets to Rs 1,200 per 10 grams, silver to Rs 3,300 per kg

As well as China factors, gold’s outlook was weakened by better-than-expected US non-farm payroll data for May, dashing hopes of an early rate cut scenario.

Mathur expects prices to fall another 3% to 4% in the coming sessions following the Fed’s comments.

Outlook

Gold’s growing appeal is due to continued demand from global central banks, geopolitical tensions and robust consumer spending trends.

While Mathur acknowledges that long-term fundamentals remain in gold’s favor, he says the sharp moves seen over the past two months have been too speculative and he expects volatility with a price correction bias to continue in the near term.

Investors may buy gold during a 4-5% dip.

Gupta believes the Fed will continue to be in a dilemma given the current climate, with mixed macroeconomic indicators and robust inflation, but he expects further adjustments in the near term.

“We expect gold prices in the international market to fall to $2,217-2,180 once they breach the support of $2,275. Resistance is seen at $2,335-2,388,” Gupta said.

For MCX August gold futures, Rs 70,080 is seen as a support level below which it can fall to Rs 68,600, analysts at HDFC Securities said, recommending short-term traders to adopt a selling strategy on the upside.

He also added that the correction represents a good buying opportunity for investors.

(Disclaimer: Any recommendations, suggestions, views and opinions expressed by experts are their own and do not necessarily represent the views of The Economic Times.

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