“The gold price tends to rise following the first cut of US interest rate cycles,” the analysts write. “On average since 1984, one calendar year after the Federal Reserve first cuts its rate after a hiking cycle, gold is 10% higher than the day of the decision to reduce interest rates, and after two years is 18% higher. The dollar tends to weaken, yields on U.S. Treasuries fall, and the economy tends to have deteriorated. All of these elements can act as a tailwind for the gold price.
They note, however, that this does not constitute a guarantee. “Two years after the first interest rate reduction in 1995, gold was 16% lower at $325.50/oz,” they say. “On the other hand, gold’s relative performance to the upside following interest rate cuts has grown since the 2001 cycle.” They acknowledge that gold’s short-term outlook is challenged by the surge in yields. “The average rate tightening cycle has lasted for 21 months with a total Federal Funds increase of 3.02%, but this point is clearly past,” the analysts write. “Historically, long-term yields peak shortly before the Fed stops increasing short-term rates. Inflation may continue to climb well after the Fed curtails rate hikes.
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