Fed cuts interest rates and signals a cautious approach
The Federal Reserve cut rates by 25 basis points on Thursday, bringing the fed funds rate to a target range of 4.5%-4.75%. While the move was widely anticipated, Fed Chairman Jerome Powell’s cautious guidance suggested a more measured approach to future cuts, reinforcing the market’s focus on U.S. economic indicators. In particular, Powell emphasized that the recent election would not impact immediate monetary policy decisions, which would further complicate the short-term outlook for gold as traders weigh the balance between inflationary pressures and limited interest rate cuts.
Traders largely expect an additional 25 basis points cut in December, with the CME FedWatch Tool indicating a 75% probability of this outcome. However, the same instrument shows that there is a high 71% chance that the rate cuts will not be implemented in January, reflecting the Fed’s cautious stance. Higher interest rates generally reduce the appeal of non-yielding assets such as gold, contributing to recent downward price pressure.
Inflation expectations create uncertainty for gold
Inflation concerns related to Trump’s rate policy have also clouded the Fed’s expected interest rate path, with many expecting significant rate action could push up inflation, potentially deterring aggressive rate cuts.
“The gold market is still finding its footing after the election outcome,” Julius Baer analyst Carsten Menke noted, highlighting that potential inflation from a Trump administration could put pressure on the Fed to slow or pause interest rate cuts.
This uncertainty has led to a “buy the rumor, sell the fact” response from investors who expect inflation to rise in 2024 but remain cautious about gold’s longer-term gains.
Weak physical demand creates extra pressure
In the physical gold market, demand weakened in India, with buyers holding firm due to price volatility due to strong festival sales. In Japan and Singapore, purchases were moderate, but overall demand remains subdued. With global investors wary of betting on higher gold prices, market sentiment remains bearish.