Key Points
- The Federal Reserve cut interest rates by half a percentage point after keeping them high for over a year.
- Gold surged to an all-time high of $2,590.13, marking a 25 percent increase in 2024.
- Investors are turning to gold amid fears of recession and economic uncertainty in the US.
In an aggressive move to support the labor market and protect the economy, the Federal Reserve cut its benchmark interest rate by half a percentage point on Wednesday, sending gold to a record high.Â
After keeping rates at a two-decade high for more than a year, it was widely expected that the Fed would decrease rates, while traders and analysts disagreed on how forceful the first cut would be.Â
Lower interest rates usually help gold, which saw a 0.8% increase to a new all-time high of $2,590.13 in New York.
Gold prices surge more than 25% in 2024
According to a report by Mining Weekly, this year, gold prices have surged considerably, rising more than 25% to set new records.
Although demand from foreign markets, especially from central banks and Asian consumers and investors, drove the early 2024 surge, attention has now turned entirely to the Federal Reserve and the US economy’s prospects.
Low interest rates typically benefit non-yielding bullion, and investor fears of a recession sometimes prompt them to look to gold for protection.
Market responses and historical trends
After analyzing economic statistics and statements from policymakers, traders in financial markets had been debating the extent of the US central bank’s first interest-rate decrease for months.
Over the last week, spot gold has repeatedly reached record highs as investors assessed the likelihood that the Fed will reduce interest rates by more than a quarter of a percentage point at this week’s meeting.
A Bloomberg News study of the previous six easing cycles dating back to 1989 shows that when the Fed decreased rates, gold, Treasuries, and the S&P 500 Index have all historically increased.
The rate reduction announced on Wednesday ends a volatile period in the gold market, with some experts predicting a return to more conventional trading patterns, specifically, gold’s historical inverse relationship to real yields.
This relationship had collapsed in recent years as gold maintained its historically high price despite sharply rising interest rates. Instead, central banks’ massive purchases of the metal and the surge in demand from Asian investors and consumers kept gold prices high.
There have been indications in recent months that Western investors are returning to the gold market as speculation of a Fed turnabout has grown.
Ten of the last twelve weeks have seen increases in holdings in gold-backed exchange-traded funds (ETFs), while long-only gold positions in Comex gold futures are currently at or near their greatest levels in the last four years.
