MW Gold may benefit from 'powerful tailwind' when Fed pivots to rate cuts, says Wells Fargo
By Christine Idzelis
'People are looking at gold as a way to hedge a Fed mistake,' says investment strategist at Themes ETFs
Gold has room to rise after reaching record highs this year, as a "shifting interest-rate landscape could be a particularly powerful tailwind," according to Wells Fargo Investment Institute.
While it's "no secret" that the Federal Reserve may cut rates later this year should it gain confidence that U.S. inflation is falling durably to its 2% annual target, "not as well known is the fact that some of gold's strongest past performances have come during Fed rate-cut cycles," analysts at Wells Fargo Investment Institute said in a note dated April 15.
Historically, the price of gold (GC00) has rallied 20%, on average, in the 24 months after the Fed has started lowering rates, according to Wells Fargo. Meanwhile, traders have pushed out their expectations for Fed rate cuts to later this year, amid hotter-than-expected inflation reports recently indicating the U.S. economy has remained resilient despite a tightening of monetary policy.
"Some of the hopes for a Fed pivot have been dashed," with gold potentially extending its rally should investors continue to hedge against the possibility that inflation resurges, said Taylor Krystkowiak, investment strategist at Themes ETFs, in a phone interview Wednesday. "People are looking at gold as a way to hedge a Fed mistake" should it cut rates prematurely, he said.
The central bank has been holding its policy rate at an elevated level in a bid to lower inflation to its 2% target. Fed Chair Jerome Powell said Tuesday that "given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and evolving outlook guide us."
Fed-funds futures show the central bank is expected to begin cutting rates in September, according to the CME FedWatch Tool, at last check. Earlier this year, many traders expected several rate cuts by the Fed in 2024, but fed-funds futures now point to potentially only two.
Gold prices are trading around $2,376 an ounce, up around 15% so far this year, according to FactSet data, at last check.
"We raised our 2024 forecast to $2,300 [to] $2,400 per troy ounce, and even higher to $2,400 [to] $2,500 per troy ounce for 2025," the Wells Fargo analysts said. "We suspect gold may need to take a breather before it moves higher through 2025."
In March 2023, Robert Minter, director of investment strategy for ETFs at Abrdn, told MarketWatch that "historically, we've seen Fed rate pauses actually kick off a bullish rally for gold." He pointed to gold's rally when the Fed paused on interest rates in 2000, 2006 and 2008.
See: Got gold? Biggest gold ETF attracts investors as the 'safe haven' yellow metal shines
Gold prices are up since the Fed paused its rate hikes last year, with the central bank last raising its benchmark rate in July.
Wells Fargo analysts said the shifting rate landscape may be a tailwind for gold over the next six to 18 months. Fundamental trends driving gold prices today include "persistent purchases from global central banks," as well as increased demand from consumers in emerging markets, "stagnating supply growth" and an escalation in geopolitical tensions, according to the note.
"We do not anticipate these trends changing anytime soon," they added.
Read: Gold scores another record high as market awaits Israel response to Iran attack
Some investors seek exposure to gold by buying shares of exchange-traded funds that track the price of the precious metal. The SPDR Gold Shares ETF GLD has climbed almost 15% this year through Wednesday, according to FactSet data.
Meanwhile, gold miners are undervalued, according to Krystkowiak.
Shares of the Themes Gold Miners ETF AUMI, which tracks an index of companies that derive their revenue from gold mining, jumped 1.7% on Wednesday while the U.S. stock market fell, according to FactSet data.
The Themes Gold Miners ETF has soared 13.6% so far this year, beating the U.S. equities market. The S&P 500 index SPX fell 0.6% on Wednesday, diminishing its year-to-date gain to 5.3%.
-Christine Idzelis
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(END) Dow Jones Newswires
April 17, 2024 17:24 ET (21:24 GMT)
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