Gold hits another record! All because of the start of rate cuts in the USA

The price of gold skyrocketed to a historic high, reaching $2600 per ounce on Wednesday night! This is nearly a 25% increase since the beginning of the year. The new price appeared momentarily, dropping back down to $2550 per ounce. This is all thanks to the September Open Market Operations Committee meeting in the US, where they decided to cut interest rates by 50 basis points (bp), therefore adjusting them to the range of 4.75-5.00%. All this confirms that gold remains one of the hottest assets of 2024.

Is 2024 the year of gold?

The price of gold broke another historical record on Wednesday night (18.09), passing the $2600 per ounce mark. However, it’s important to note that its current value is about $2570. In Polish zloty (PLN), its value reached nearly 9920 PLN, but today it is worth 9870 PLN.

It should be emphasized that since the beginning of the year, the value of the metal expressed in US dollars has increased almost by 25%, and in PLN by almost 22%, hence beating new records at every stage. Meanwhile, the gold market still remains one of the most stable investments for individuals searching for a safe haven.

The new record was set during the Wednesday night meeting of the Open Market Operations Committee in the US, where they decided to cut interest rates by 50 bp – points out Tomasz Gessner, the chief analyst at Tavex. It’s good to know that gold is a very sensitive topic for the current monetary system and its records simultaneously expose the declining purchasing power of the dollar. Gold also competes with other asset classes, such as stocks, bonds or investment funds, hence investment media are usually cautious when covering the topic of gold. This could be evidenced by the relatively lower number of articles about gold, despite the excellent year so far for the metal, which is significantly fewer than during the Covid peak and after the outbreak of war in Ukraine. This media silence paradoxically provides a positive outlook for the continuation of the trend – he adds.

Central banks are also increasingly appreciating the precious metal. According to the latest Central Bank Gold Reserves (CBGR) survey conducted in the first half of 2024, as many as 29% of central banks plan to increase their gold reserves in the next twelve months. This is the highest percentage since the start of the survey in 2018, showing the crucial role that gold plays in global financial policies. Our National Bank of Poland also recognizes this value. According to the latest data, after the recent purchases, exceeding 6 tons of gold, the reserve of the precious metal in Poland is now almost 398 tons. The proportion of gold in national reserves exceeds 15% – hence, the goal of reaching 20% in the near future is getting closer.

USA begins interest rate cuts

We are past the September meeting of the Open Market Operations Committee in the US. Investors have been expecting interest rates to be cut for some time now. However, there was exceptional uncertainty about the scale of the cut just before the meeting. The cuts were either 25 bp or 50 bp. Ultimately, the rates were cut by 50 bp, hence they have been adjusted to the range of 4.75-5.00%.

These ambiguous expectations also carried potential risks for investors. A 25 bp rate cut could trigger a so-called selling of facts, which would imply market downturns following the announcement of the decision. However, a 50 bp cut, although theoretically more favorable to riskier assets, could raise investor concerns about the state of the economy – why did the Fed decide to make such an aggressive move? The answers to these questions can be found in the latest macroeconomic projections, which point to worsening economic prospects. The GDP dynamics will remain at the 2% level for three years, but there was a larger adjustment to unemployment rate forecasts, which is expected to be 4.4% in 2023 and 2024, and 4.3% in 2026. In June, lower levels were forecasted: 4.0%, 4.2%, and 4.1%, respectively. The deterioration in growth and employment forecasts, coupled with lower inflation, suggests room for looser monetary policy – emphasises Tomasz Gessner, chief analyst at Tavex.

After the initial positive reaction to the larger interest rate cut, concerns quickly arose about the actual cause of the 50 bp move. It is also worth remembering that besides doubts about economic growth and rising unemployment, the Treasury Department still has to place bonds worth about $5.5 trillion in the market this year, hence it is in desperate need of a lower price of money, which was supplied by the Fed.

However, it is important to remember that if the cycle of rate cuts initiated in the United States yesterday were to reignite inflation pressure rather than economic growth to a greater extent, this would be a very good environment for the precious metals sector, especially in relation to the stock market.