Why are falling rates bullish for gold?
Falling yields reduce returns for Treasury security investors, enhancing the appeal of non-yielding or dividend-paying gold to investors seeking higher returns.
During the recent Federal Reserve Bank (FED) meeting, Jerome Powell, the FED chairman, announced a possible pivot in rate hikes while discussing the updated dot plot of lower future interest rates in 2024. While there are mixed opinions on whether the FED will lower rates, the FED chairman indicated the option is on the table.
Many market participants expected to hear a dovish tone from the chairman regarding a pause or end to rate hikes but instead received an early Christmas present of actual rate cuts. The Fed Funds watch from the CMEGroup exchange forecasted these rate cuts for early next year. Still, the FED's history of being late for the last several pivots in interest rates may have surprised the market by seeing the FED acting so responsively this time.
Was this politically motivated with the upcoming 2024 general election? Does the FED see economic weakness ahead, or is it jawboning to bring down the long end of the yield curve? Regardless, the market instantly went risk on weakening the US dollar, equity market rallies, and commodity prices along with gold rebounding.
Gold prices can be affected by the timing and the size of interest changes. For example, gold may react more strongly in the initial phases of rate cuts than in the later ongoing cuts. Markets are forward-looking and generally anticipate events in the market rather than react.
Technical View
Source: Barchart.com
The continuous weekly-nearby chart illustrates how gold has been in an extensive trading range since August 2020. After closing at all-time highs in late November 2023, gold prices have returned to a support area of the previous all-time high closing prices. The recent FED announcement may give the gold market some legs to rally from this level.
Seasonal Pattern
Moore Research Center Inc. editor Jerry Toekpe commented on the upcoming seasonal pattern of gold prices and listed the holidays that typically support higher prices each year. "Most people are familiar with gold, either as jewelry or investment. In some years, 70% of all gold mined is made into jewelry. Retail demand has traditionally been greatest during the fourth quarter. India celebrates the harvest, the early wedding season, and Diwali --- for which gold and gold jewelry are highly prized. The West then celebrates Hanukkah and Christmas. Shortly after the calendar turns, the Chinese New Year comes- February 10, 2024, the Year of the Dragon. Also, in 2024, Ramadan will be observed from March 10-April 9. Thus do the 5-. 15-. and 30-year seasonal patterns illustrate how gold has tended to rally dynamically from mid-December into or even through January."
During this past week, China initiated one of its most significant economic stimulus packages. Their real estate economy and large debt create multiple problems for the Chinese economy, which is trying to gain traction. Could the Chinese government push the envelope with their stimulus packages in hopes the Chinese New Year will bring more cheer and money spending from their citizens? If so, gold may get an additional boost in consumer purchasing.
Source: Moore Research Center, Inc. (MRCI)
Seasonally, the graph from MRCI illustrates that gold has historically had a significant rally from the end of December to late February. Their research has revealed that all three durations, 5, 15, and 30 years, have demonstrated the same directional move. The magnitude of this move is impressive as well. The scale on the left measures the historical tendency for the market to make a seasonal high (100) or low (0) at a given time. Gold's historical bullish performance during this period continues into the Last Trading Day (LTD) of the February gold futures contract.
In closing
As long as markets anticipate lower rates, the US dollar should continue to lower, offering gold bulls an opportunity to see capital appreciation. Adding the holidays attracting more gold buying may be the perfect storm for gold prices as they break out of multi-year sideways trading.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
