Gold Hits New Record on Multiple Cut Expectations

Gold (XAU) prices jumped more than 1% to a record high of $2,464 per ounce on Tuesday, 16 July, driven by expectations of a Federal Reserve interest rate cut in September and the increasing likelihood of Donald Trump winning the upcoming presidential election. Furthermore, this boost was extended as a new record high of $2,482 per ounce was posted on Wednesday, 17 July, fueled by growing Fed cut chances. 

Some analysts predict gold prices will continue rising this year and next, as traders expect  three interest rate cuts this year, which could potentially support  gold prices. 

Besides silver (XAG), platinum (PL) and palladium (PA) seeing price increases, the surge in gold prices also helped some gold miners tilt higher.

What Is Driving Gold a Record High?

Gold prices have been upbeat since 11 July after weaker-than-expected US CPI inflation data heightened expectations of interest rate cuts by the Fed. The readings appeared to have added to the Fed's confidence that inflation is returning sustainably to the 2% target, suggesting that an interest rate cut may not be far off. 

Additionally, the assassination attempt on Donald Trump over the weekend also boosted his chances of being reelected in November, which could lead to tax-cutting and tariff plans potentially increasing the US budget deficit and fuelling inflation. A rise in inflation could support gold's appeal as a hedge. However, tax cuts could increase the appeal of equities and limit the pace of rate cuts by the Fed, which could limit gold’s upside and strengthen the dollar (DX).

Furthermore, Fed Chair Jerome Powell said at the Economic Club of Washington on Monday that the economy was performing well and that the Fed would lower borrowing costs once it was confident that inflation was moving toward the 2% goal, reassuring markets that a US rate cut is likely in September.  Nonetheless, these are only expectations, and only time will tell what lies ahead. (Source: Reuters)

Market Expectations of Further Cuts

Markets are now pricing in two or three US interest rate cuts by December, up from just two rate cuts expected last week, which is supporting higher gold prices.

In fact, many traders believe that the Fed will cut rates by September, according to the CME FedWatch tool, followed by further cuts in November and December, bringing the policy rate down to 4.5-4.75% by the end of the year. The target rate probabilities for a 25-basis point cut for the September 18 Fed meeting stand at 91.6% as of the time of the writing, 58.4% for 7 November and 52.2% for 18  December.

Powell also said on Monday that the Fed won't wait for inflation to reach 2% before cutting rates, given the delay in monetary policy effects. Still, inflation data released over the next week will likely show that PCE inflation has eased closer to the 2% target, which may further increase the likelihood of a Fed September cut. 

2024 Performance and Analyst Outlook

The bullion price is up almost 20% this year, boosted by anticipation of Fed easing, central bank buying and escalating tensions in the Middle East. 

Some analysts believe gold prices could continue to rise, driven by the same factors as in the first half of the year. However, if the FOMC reveals cautiousness about cutting rates, gold prices could see a short-term negative impact. 

Central banks are also expected to remain active buyers in 2024, while ETF flows could pick up once the Fed begins cutting rates, tightening the physical gold market and further supporting gold prices. The first quarter of 2024 alone saw net bank purchases of 290 tonnes, which indicates ongoing demand.

JPMorgan's (JPM) economic forecast, published on 15 July, projected gold to reach $2,500 per ounce in the fourth quarter, assuming a November cut. With the target hot achieved about two quarters ahead of time, the bank’s forward two-quarter projection of $2,570 per ounce may also see a premature attainment.

Conclusion

Gold increased over 1% to a record high on Tuesday, driven by expectations of more Fed rate cuts starting in September 2024 and the increasing likelihood of Donald Trump winning the upcoming presidential election. Analysts predict prices will continue rising this year and next.

As Fed Chair Jerome Powell reassured markets of likely rate cuts while geopolitical tensions persist, the outlook for gold remains strong. Especially since central banks continue to buy bullion. However, a shift in these factors can also negatively affect the precious metal's performance this and next year, leaving the outlook of gold uncertain until time proves otherwise.