Jumbo Cut Drives Gold Rally In Sept; How's It Looking For Investors Ahead?

The global gold market experienced a significant rally in September 2024, fueled by a surprise ‘jumbo rate cut’ by the US Federal Reserve and a series of geopolitical and macroeconomic factors. According to the latest report by the World Gold Council (WGC), gold prices surged 4.6 per cent in September, reaching fresh highs multiple times before closing at around USD 2,630/oz. This marks a continuation of the upward trend observed over the pressing months, driven largely by the shifting monetary policies and rising demand for the precious metal.

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The Impact Of Fed’s Bold Move On Gold

The primary driver of the September rally was the Federal Reserve’s unexpected 50 basis points (bps) rate cut, the first of its kind since the Fed started signaling a pivot away from its earlier hawkish stance, the WGC report states. This move weakened the US dollar, making gold more attractive for investors looking for safe-haven assets. As per WGC’s Gold Return Attribution Model (GRAM), this decline in the dollar directly contributed to gold/s climb, even as momentum factors provided a marginal drag on gains.

Geopolitical Tensions Add Fuel to the Rally

In addition to the US’s monetary policy impact, rising geopolitical tensions in the Middle East played a role in driving demand for gold. Investors highly cautious of such conflicts and their aftermath on markets seek refuge from the increased uncertainty in gold investments. The demand for gold-backed exchange-traded funds (ETFs) has grown as a result of this uncertainty, extending the inflow streak into a fifth consecutive month, the report notes.

North American funds, in particular, made significant contributions to these inflows, underscoring the region's heightened demand for gold amidst global uncertainty.

How Is It Looking Ahead For Investors?

For the past two years, US equity and bond markets have shown high levels of correlation. This has presented a challenge for investors seeking diversification in their portfolio, the WGC analysis notes. This increased correlation has diminished the traditional risk-mitigating benefits of holding stocks and bonds together, driving many to explore alternative hedges like gold.

Therefore, the macro environment suggests a favourable outlook for gold, given the current mix of lower yields, volatile corporate spreads, and a landscape favoring assets with hedging properties, the WGC states.

Risk-off Phase Might Benefit Gold Investors: How?

The economic landscape is currently in a “risk-off phase”, the report states. Risk-off marks a period where falling bond yields and widening credit spreads benefit gold as investors move towards safety as they are pessimistic about the global economy. Historically, such an economic environment has been followed by a “quantitative easing (QE)-style goldilocks” phase about 70 per cent of the time. This is characterised by the central bank easing monetary policy and an accommodative policy stance.

A Goldilocks economy typically refers to the perfect or the ideal state of an economy reflecting the stability of growth, complete employment, and so on. Such a shift could further support gold prices, especially as rate cuts are expected to continue, providing a tailwind for the precious metal.

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How Have Rate Cuts Affected Gold Market Historically?

As per the report, historically, gold has performed well in the months following the onset of rate-cutting cycles, with an average return of around 6 per cent in the first six months after a cut. This trend suggests that gold could continue its climb if the Federal Reserve remains on its current path of easing.

“With central bank purchases boosting the demand, particularly in key markets like India, and Western ETF investors returning, gold’s prospects remain strong as we head into the final quarter of 2024 (Q4),” WGC notes.

What Does This Mean For Investors?

For investors, the evolving macroeconomic conditions and heightened geopolitical risks offer both opportunities and challenges. The high correlation between equities and bonds has made portfolio diversification more difficult, the WGC states, but gold’s historical role as a hedge against volatility remains just as relevant.

As the global economy teeters between a soft and hard landing due to conflicts in different parts of the world, many analysts suggest that gold could serve as a strategic asset, offering resilience in uncertain times.

Additionally, as WGC notes, with the potential for further rate cuts and a shift towards a QE-style environment, gold’s appeal is likely to persist, especially if inflationary pressures and market volatility remain persistent. Investors should keep an eye on global economic indicators, geopolitical development, and central bank actions as these would continue to play a critical role in determining where the gold market turns.