Markets are pricing in around a one-in-four chance of a large half a percentage point cut by the Fed in September, which would take the benchmark to the 5 per cent to 5.25 per cent range. Traders also expect four 25 basis point US rate cuts before Christmas and another four in 2025.
Gold is traditionally considered a hedge against economic uncertainties, and higher rates tend to weigh on the zero-yield asset.
As a guide, gold prices have climbed 6 per cent on average at the start of the last four easing cycles in the world’s largest economy, and most of the appreciation happened before the first-rate cut, noted Mr Hynes. The commodity value rises further during the easing cycle, he added.
Perennial Partners is among investors who are already betting on such an outcome. Perth-based fund manager Sam Berridge, who oversees the firm’s Natural Resources Trust, started to snap up Australian gold stocks months ago on signs that high US borrowing costs were hitting consumers.
At the time, financial markets barely anticipated lower interest rates, ascribing just one rate reduction before Christmas this year, he recalled.
“We suspected that as the economic data continued to deteriorate, the number of cuts would increase,” he said. The outcome would be lower borrowing costs and probably lower real rates, both supportive of gold prices.
Stocks on a tear
So far, his bets have paid off. The share price of Ora Banda Mining has more than doubled this year and hit a decade-high of 50.75¢ on Monday. Genesis Minerals and Capricorn Metals have each advanced more than 22 per cent each since January.
Katana Asset Management said the biggest reason to invest in gold was the outlook for the US dollar.
Perth-basedportfolio manager Romano Sala Tennasaid the US government had already borrowed at a faster pace than the economy was able to grow. This, he predicted, would erode the value of the US dollar as bond buyers diversify away from US Treasuries.
A weaker greenback makes gold cheaper for purchasers holding other currencies.
“The only other asset investors can own in scale is gold,” he said. That’s why we are seeing central banks buying gold in record amounts.
World Gold Council data showed central banks in Turkey, India, China and Poland were the largest buyers of physical gold this year, even though China has been sitting on the sidelines in the past months.
Mr Sala Tenna said he was optimistic that Beijing would resume its purchases and push the commodity price even higher.
He also anticipates retail investors to return to the asset class through exchange-traded funds. “Investors are very underweight gold, and we’re going to see a bit of FOMO (fear of missing out),” he said.
Katana’s top two gold holdings are West African Resources and De Grey Mining.
Global gold ETFs had their strongest month in more than two years in July, which followed a couple of years of outflows, and sent assets under management to a record high of $US246 billion, World Gold Council data showed.
Ray Attrill, head of FX strategy at National Australia Bank, also said that gold was a key beneficiary of cryptocurrencies falling out of favour ahead of the US elections. He noted that digital currencies had rallied on Donald Trump returning to the White House.
Crypto prices have since retreated after US Vice President Kamala Harris announced her decision to run, as markets priced in the chance of winning in November. Bitcoin traded at $US58,516 on Monday, down from over $US70,000 in late July.
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