Overview
- The trend of gold may vary greatly due to different economic, geopolitical, and market factors.
- Historical data shows that during interest rate cutting cycles, as investors seek safe-haven assets, gold often performs well.
Gold has long been considered a safe-haven asset, and investors tend to flock to this precious metal in times of economic uncertainty. However, the trend of gold may vary greatly due to different current economic situations. Given the possibility of the Fed starting an interest rate cutting cycle, then historically, during declining or stable interest rate periods, with different combinations of economic growth rates and inflation levels, how does gold perform?
1. Decreasing interest rates, economic slowdown with decreasing inflation (soft landing)
During periods of decreasing interest rates, economic slowdown, and decreasing inflation, gold usually performs moderately. A typical example occurred in the early 21st century, especially during the period from 2001 to 2003.
At that time, following the burst of the internet bubble and the 9/11 terrorist attacks, the US economy slowed significantly. The Federal Reserve took aggressive interest rate cuts in response, reducing rates from 6.5% in January 2001 to 1% in June 2003. At the same time, inflation also dropped from 3.4% in 2000 to 1.6% in 2002.
Gold showed an overall uptrend during this period, but the increase was not significant. The price of gold rose from around $270 per ounce in early 2001 to approximately $350 per ounce by the end of 2003, representing an accumulated increase of about 30% over three years.
Affected by multiple factors, gold has shown a relatively moderate performance during this period. Although low interest rates usually support the gold price by reducing the opportunity cost of holding this non-yielding asset, deflationary environment and slowing economic growth bring pressure in the opposite direction.
Looking ahead to the decisions of the Federal Reserve in September and subsequent meetings, in a mixed scenario of maintaining controlled inflation without triggering a recession (demonstrated by gradual rate cuts and stable economic growth), gold price may still be supported by ongoing inflation concerns and the implementation of loose policies. This could make gold an effective hedging tool in the coming months.
Due to market price fluctuations, the daily trading volume of micro gold futures increased by 27% from the beginning of 2024 to the end of the second quarter, reaching 93,000 contracts. The latest data for August shows that the daily trading volume of micro gold futures in that month increased by 170% compared to August 2023, reaching 124,000 contracts.
2. Rapid interest rate cuts, sharp economic slowdown, and simultaneous decline in inflation.
During periods of rapid interest rate cuts, sharp economic slowdown, and simultaneous decline in inflation, investors' demand for safe-haven assets usually turns bullish for gold. A typical example occurred during the 2008 global financial crisis.
To address the crisis, from September 2007 to December 2008, the Federal Reserve drastically reduced interest rates from 5.25% to near-zero levels. The U.S. economy sharply contracted, with real GDP falling by 2.5% in 2009. Inflation also dropped from 3.8% in 2008 to -0.4% in 2009.
Gold performed exceptionally well during this period of economic turmoil. From the end of 2007 to the beginning of 2009, the gold price soared from around $700 per ounce to surpass $1,000 per ounce, and continued to rise in the following years, reaching a peak of nearly $1,900 per ounce in 2011.
The strong performance of gold in this crisis is closely related to its status as a safe haven asset. As the financial system is on the brink of collapse, the value of traditional assets such as stocks and real estate plummeted, prompting investors to increasingly favor the safety attributes of gold. Although as of early September, the US economy remained relatively stable, any signs indicating a more severe economic downturn could prompt the Federal Reserve to take more aggressive actions, highlighting the role of gold as a safe haven asset.
3. The decline in interest rates, stable economic operation, and rising inflation.
The period from 2003 to 2006 provided another interesting case study material. During this period, the US economy operated relatively smoothly, with an average annual GDP growth rate of around 3%. Inflation rose slightly from 1.6% in 2002 to 3.2% in 2006. The Federal Reserve had maintained low interest rates in the early 21st century, gradually entering a tightening cycle starting in 2004 while still maintaining an overall accommodative stance.
The price of gold performed strongly during this period, rising from about $350 per ounce in early 2003 to over $700 in mid-2006, achieving nearly 100% growth in just over three years.
The impressive performance of gold during this period was benefited by a combination of multiple factors. Rising inflation sparked demand from investors for gold as an inflation hedge, while the opportunity cost of holding gold remained relatively low due to only gradual interest rate increases. As of early September, the Federal Reserve hinted at potential rate cuts while inflation remains above the target level. Similar to the period from 2003 to 2006, this environment could be bullish for gold.
The gold price pattern is difficult to predict.
Historical evidence shows that the performance of gold assets may vary significantly depending on the current economic conditions. However, gold prices also exhibit some common patterns:
• Gold often performs well in times of economic uncertainty, especially when investors seek safe haven assets during a declining interest rate cycle.
- Inflation rising, especially if accompanied by low interest rates or interest rate cuts, can create a particularly favorable environment for gold prices.
- In a deflationary environment, the performance of gold may be relatively flat, but gold can still attract investors seeking means of preserving value during economic downturns.
- Stable economic growth can create a favorable environment for gold investments, especially in the case of loose monetary policies and rising inflation expectations.
It should be noted that while these historical patterns can be referenced, the gold market is still affected by the interplay of economic, geopolitical, and market factors, and the price of gold may sometimes deviate from historical patterns. As the Federal Reserve continues to evaluate and adjust U.S. monetary policy, gold will become an asset of interest to many market participants.
