Gold Continues To Shine

Yesterday’s Federal Open Market Committee (FOMC) renewed hope for a soft economic landing. As most expected (or at least the futures market), the Federal Reserve (Fed) reduced policy rates by 0.5%, marking the first rate cut since 2020. Policymakers also penciled in 0.5% of cuts by year-end and an additional 1.0% of cuts by year-end 2025, equating to a potential federal funds rate of 3.0%–3.5% by the end of next year. Perhaps most importantly, the Fed managed to reduce rates without signaling any signs of panic among policymakers.

Fed Chair Jerome Powell voiced confidence in the outlook for the economy, stating, “I don’t see anything in the economy that suggests that the likelihood of a recession, of a downturn, is elevated,” while further adding, “You see growth at a solid rate, you see inflation coming down, and you see a labor market that is still at very solid levels.” Despite upward revisions to the Fed’s unemployment forecasts, Powell also managed to assuage fear over the cooling labor market as he qualified the slowdown as more of a normalization from an “overheated state.” Although maybe the message was lost amid yesterday’s FOMC hype, this was what investors wanted to hear from the Fed, evidenced by the broader market’s rally to record highs.

With a rate cut widely expected since August, LPL Research has proactively published content on what a rate-cutting cycle could mean for stocks and bonds (What Does a Rate Cut Mean for Stocks and Bonds?) along with styles and sectors (What Rate Cuts Could Mean for Equity Sectors). In today’s blog, we extend this topic to gold and highlight the technical setup for the precious metal and how it historically performed after the Fed began cutting rates.

Technical Setup

Gold has rallied over 20% this year, outpacing most risk assets. Falling yields, a weaker dollar, central bank demand, a jump in over-the-counter buying, and elevated geopolitical risk have been key catalysts driving the advance. As highlighted below, gold remains in an uptrend and recently broke out from a multi-month range in August. Momentum indicators remain bullish, and as noted in the lower panels, demand for physical gold ETFs has also returned.

With the precious metal in record-high territory, the next question from investors is how high could this rally go. Technical analysis points to a minimum price objective near $2,675 based on the size of the prior trading range. In the event of a pullback, watch for support from the August highs/20-day moving average (dma) near 2,525 and at the 50-dma (2,473).

No Flash in the Plan — the Gold Rally Is Real

Source: LPL Research, Bloomberg 09/19/24
Disclosures: Past performance is no guarantee of future results. Any futures referenced are being presented as a proxy, not as a recommendation.

Potential Impact of a Rate-Cutting Cycle

Rate cuts generally imply lower yields and a potentially weaker dollar — a recipe for stronger gold prices as other income-generating safe haven assets become less competitive and the commodity becomes cheaper to purchase. And while inflation is falling, potentially reducing the allure of gold as an inflation hedge, the direction of interest rates, central bank demand, and the geopolitical climate tend to have more of an impact on the yellow metal.

Of course, the Fed has a significant impact on interest rates, and with the pivot to rate cuts officially underway, we analyzed how gold performed after the Fed starts cutting rates. Based on the last nine major rate-cutting cycles since the 1970s, gold has generated an average 12-month gain of 3.7% following the first rate cut. The peak in gold performance has historically been around the six-month window, where average gains reached 10.8%, suggesting current upside momentum could continue at least into the first quarter of next year.

Progression of Gold After Rate Cuts Begin

Source: LPL Research, Bloomberg 09/19/24
Disclosures: Past performance is no guarantee of future results. Any futures referenced are being presented as a proxy, not as a recommendation. Progression data based on first Fed rate cuts in 1974, 1980, 1981, 1984, 1989, 1995, 2001, 2007, 2019

Summary

The Fed has managed to reduce interest rates and simultaneously renew confidence for a soft landing. Investors have welcomed the monetary policy pivot by bidding stocks to record highs. Participation in the rally has been broad, with cyclical sectors starting to recapture the leadership reins. Gold has also climbed to new highs amid a backdrop of strong demand, falling yields, and a weaker dollar. History suggests the momentum could continue as the yellow metal has posted strong six-month returns after a rate-cutting cycle begins.

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its neutral stance on equities and continues to watch for a potential pullback. Improving technical trends, solid earnings growth, cooling inflation, and lower interest rates support the bull case, partially offset by building overbought equity market conditions, election uncertainty/weak seasonality, and historically high valuations.