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What Will Happen To Gold When The Fed Starts Cutting Rates

Derek Wolfe

Updated: November 10, 2022

Bars of gold on a calculator
Editor’s Note:

EDITOR'S NOTE: What will happen to gold once the Fed begins cutting interest rates? While promising economic news seems to be in scarcity these days, we finally get some glimmer of hope, albeit for gold investors, from Goldman Sachs. Goldman’s comments come at a time when the yellow metal appears to be bouncing back from extreme bargain levels (sorry if you missed the boat on this one). The comments themselves don’t say much of anything we don’t already know, but they do reaffirm gold’s long-standing status as a safe haven hedge against economic storms, whether it comes in the form of inflation or a deep recession.

In recent weeks, gold has been caught in a perfect vice of bullish and bearish forces.

On one hand, the Hawkish Fed has continued to pile relentless pressure on the precious metal; to wit, during his recent press conference, Chairman Powell hinted at slowing down the pace of rate hikes, while also signaling that terminal rates may peak at a higher level. Following the conference, US rates and the dollar surged. Importantly, the Fed reiterated that bringing inflation down to 2% remains a top priority, triggering a sharp fall in gold after the announcement.

But wait, isn't inflation good for the world's oldest inflation hedge? Well, as Goldman's Mikhail Sprogis writes in a note this morning, in given circumstances, it is: for example, high inflation tends to be (extremely) bullish for gold when the market questions the central bank’s ability to fight it, such as during Burns’s tenure in the 1970s. In contrast, high inflation tends to be bearish for gold when the market gives the CB credit in its ability to reduce it, such as during Volcker’s fight on inflation in the early 1980s.

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