Gold Price Eyes $3,000 as Market Bets on Federal Reserve Rate Cuts

The market has fully priced in a September rate cut by the Federal Reserve, and the clamor for a July rate cut is gaining momentum. According to the CME Group's "FedWatch" tool, the probability of the Federal Reserve maintaining its rates unchanged by September is at a flat 0.0%.The likelihood of a cumulative 25 basis point cut stands at 91.7%, and a 50 basis point cut at 4.5%.

An increasing number of Wall Street economists warn that the Federal Reserve has waited too long to reverse its policy after raising its benchmark interest rate to its highest level in two decades. Recent modest inflation data, coupled with slowing economic growth and rising unemployment, are fueling calls for the Fed to cut rates at its upcoming policy meeting in two weeks.

Jan Hatzius posits that the Federal Reserve has a solid rationale for initiating rate cuts as early as the July meeting. He points out that the latest unemployment and inflation data indicate that the Fed's monetary policy rules necessitate a federal funds rate of 4%, while the current target range is 5.25%-5.5%.

Consequently, he predicts that an adjustment in rate cuts will commence soon. Hatzius also mentions that taking action in July is justified to avoid any temporary upticks in monthly inflation, which could complicate the rationale for a September rate cut and to "avoid the undeniable (albeit never acknowledged) motive of not initiating a rate cut in the final two months before a presidential election." He concludes, "If the reasons for a rate cut are clear, why wait seven more weeks to put them into practice?"

Mohamed El-Erian noted in late June that the Fed's favored inflation indicators are showing weakness, underscoring that the economic slowdown is amplifying the risk of central bank policy errors. "The pace of the economic slowdown has exceeded the expectations of most economists and the Fed itself. The economy is slowing with little cushion," he said. "A forward-looking Fed would certainly be open to the possibility of a July rate cut. Instead, the current Fed remains excessively data-dependent, requiring a considerable amount of historical data to change its stance."

Analysts at Bank of America forecast that gold prices could soar to $3,000 per ounce within the next 12 to 18 months. They attribute this potential surge to an increase in non-commercial demand, driven by Federal Reserve rate cuts, which could channel funds into physically-backed gold ETFs and boost trading volumes. Central bank purchases are another critical factor. Bank of America notes, "Continued gold buying by central banks is significant, as efforts to reduce the dollar’s share in forex portfolios may prompt more central banks to buy gold."

Citi analysts, including Maximilian J. Layton, project that central bank gold purchases could support gold prices stabilizing between $2,700 and $3,000 per ounce over the next 25 years. Citi points out that the main driver of gold pricing is the proportion of investment demand relative to mined supply. Over the past two years, central bank investment demand has surged, dominating mine supply and pushing gold prices higher. They anticipate that future investment demand and price increases will stem from the normalization of U.S. interest rates, with the Citi U.S. economic team predicting eight consecutive rate cuts by the Fed starting in September. Additionally, the ongoing trend of de-dollarization is expected to continue bolstering global central bank gold purchases.

As central banks are structurally increasing their gold purchases, they also appear to be becoming more tactical around price.

China’s record gold imports might face downward pressure after the People's Bank of China—which controls the amount of gold entering China via quotas to commercial banks—paused reported gold reserve purchases in May, ending a massive buying spree that ran for 18 months. However, central banks and other physical consumers are expected to remain strong dip buyers, supporting a higher floor in gold prices.

"Many of the structural bullish drivers of a real asset like gold—including U.S. fiscal deficit concerns, central bank reserve diversification into gold, inflationary hedging, and a fraying geopolitical landscape—have lifted prices to new all-time highs this year despite a stronger U.S. dollar and higher U.S. yields, and will likely remain in place regardless of the U.S. election outcome this autumn, said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan. "Nonetheless, precious metals markets will be focused on any potential policy changes that could accentuate or alter one or more of these themes."