Fed interest rate cuts bullish for gold
While geopolitical concerns and strong central bank buying have helped put a floor under the gold price, many experts believe it will really start to move once the Fed starts lowering interest rates.
Lobo Tiggre, CEO of IndependentSpeculator.com, told the Investing News Network (INN) in March that he's closely watching the Fed's upcoming rate-cutting cycle, which is likely to be positive for gold.
“That portends very bullish things for not just the metal, but for the associated equities," he said.
Brien Lundin, editor of Gold Newsletter, echoed Tiggre’s sentiment on the impact that the Fed's upcoming turnaround is having on gold. “The big picture is that the market is now trying to price in a Fed pivot,” he said.
However, he noted that expectations keep shifting as to when the Fed's first cut will come, which has caused some volatility in the space. But investors can be rest assured that it will be this year.
“I think the markets are missing the big picture largely, and that’s the fact that the Fed will have to pivot this year because of the cost of servicing the federal debt at these interest rate levels,” Lundin explained. “The Fed will have to pivot and other central banks will follow suit. When that happens gold will do very well.”
Gold appears to be moving in anticipation of a Fed turnaround, and it wasn't dampened by Fed Chair Jerome Powell's Wednesday speech at the Stanford Graduate School of Business. In it, he said that the central bank is in no rush to start easing monetary policy, and will keep looking for inflation to cool further.
“We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%,” he commented. “Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.”
However, Powell did intimate that lowering interest rates is still on the table for 2024. "If the economy evolves broadly as we expect, most (Federal Open Market Committee) participants see it as likely to be appropriate to begin lowering the policy rate at some point this year," he said. As Bart Melek, global head of commodity strategy at TD Securities, noted, that's positive for gold as it means the Fed will cut rates before it's reached its inflation target.
As of Wednesday, CME Group's (NASDAQ:CME) FedWatch tool showed a 98.8 percent likelihood that the Fed will leave rates unchanged in May, and a 61.7 percent probability that it will cut to the 5 to 5.25 percent level in June.
Looking at just how far gold could rise, Chris Blasi, president of Neptune Global, said he thinks the precious metal is in the third leg of a two decade bull market. "This leg is going to show the returns that a lot of people in this community of precious metals investors have been expecting for over a decade," he told INN in an interview.
When will gold stocks finally move?
With the gold price historically high, market participants are hoping much-beleaguered gold equities are next.
Commenting on the wide gap between the yellow metal and gold stock values, Rick Rule, proprietor at Rule Investment Media, told INN, “I have not seen as great a disconnect between the gold price and the gold stocks in my career.” And yet, he believes that “the fact that nobody wants to be in gold equities is their greatest asset.”
Tiggre agrees. “Gold stocks are still not getting any love,” he acknowledged. “Of course, I see that as an opportunity.”
In terms of timing when to get into gold stocks, the experts suggested positioning before the Fed makes its first rate cut. As Lundin pointed out, undervalued gold stocks can be had at bargain prices right now.
“I think the money is going to flow, and I think that will very quickly lead to a big rally in the mining stocks," he said.
Figure 1 – Mandilla and Feysville Gold Projects location map.
