Gold poised for record rally after minor setback if Fed opts for 25 bps cut: Goldman Sachs

Gold is likely to experience a short-term decline if the Federal Reserve opts for a modest 25-basis-point interest rate cut this week, but Goldman Sachs analysts expect the metal to stage a strong rally soon after.

According to a note from Goldman analysts Lina Thomas and Daan Struyven, the rally will be driven by renewed inflows into bullion-backed exchange-traded funds (ETFs).

Gold prices held steady on Tuesday to hover near record highs scaled in the previous session, as markets anticipate the beginning of a US easing cycle, with expectations that it might start with an outsized rate cut.

Spot gold was flat at $2,582.84 per ounce, as of 0020 GMT. Bullion rose to a record high of $2,589.59 on Monday. US gold futures were also steady at $2,609.90.

The bank reiterated its forecast that gold prices will surge to $2,700 per ounce by early 2024, marking a new record high.

Gold rally backed by ETF inflows

Gold has been one of the best-performing commodities in 2023, climbing approximately 25% this year and repeatedly setting new records.

The metal’s upward trend has been fueled by central banks increasing their gold purchases and traders anticipating the Federal Reserve’s shift toward a more accommodative monetary policy.

However, opinions among investors remain split as to whether the Fed will implement a half-point rate cut or the more moderate 25-basis-point reduction that Goldman Sachs expects.

Source: Bloomberg

“Fed rate cuts are poised to bring Western capital back into gold ETFs, a component largely absent of the sharp gold rally observed in the last two years,” said Goldman Sachs.

While a smaller cut may cause a short-term dip in prices, the analysts predict that ETF holdings will increase gradually as the Fed continues its easing cycle, supporting higher prices in the longer term.

ETF holdings rebounding but still below pandemic highs

Holdings in gold-backed ETFs have seen a recovery in recent months, after hitting their lowest level since 2019 in mid-May, according to Bloomberg data.

Despite the sustained rise in gold prices, total ETF holdings remain 25% below their peak during the pandemic in 2020.

“Since ETF holdings only increase gradually as the Fed cuts, this upside is not yet fully priced in,” noted the Goldman analysts.

They also pointed out that inflows into bullion-backed ETFs reduce the physical supply of gold available to the market, further supporting higher prices over time.

Silver tracking gold's gains

Alongside gold, silver has also been on a steady upward trajectory. Spot silver climbed toward $31 per ounce and marked its seventh consecutive day of gains, its longest winning streak since 2019.

As the market awaits the Fed’s decision on rate cuts, gold prices are expected to remain near their recent highs, with the possibility of further gains should the anticipated inflows into ETFs materialize.