Gold Rally Potentially the Result of Bullish Catalysts Underlying Both Dovish and Hawkish Scenarios at Fed

A surge in precious metals prices has pushed gold to record highs in recent days, defying a subsequent jump in long-term yields. Central banks around the world are becoming net accumulators of gold as the Federal Reserve heads toward a consequential decision on the direction of monetary policy in the US. Whether the Fed chooses to begin trimming interest rates before the end of the year or stay on hold with its benchmark rate at a multi-decade high, each scenario could herald bullish prospects for precious metals.

A cut to interest rates would broadly increase the appeal of commodity bets as inventory costs associated with holding these materials would fall as well. However, persistently high rates have recently been attributed to worsening inflation in some sectors of the economy and are also sapping the US government’s fiscal health by massively increasing interest payments owed on US Treasury debt. Concerns about the national debt are not apart of the Fed’s dual mandate, but Fed Chair Jerome Powell has openly acknowledged that the current fiscal path is unsustainable. 

Related ETFs: SPDR Gold Shares (GLD), iShares Silver Trust (SLV)

The recent rally in precious metals has pushed gold prices to new records and silver to a near three-year high. It has also confounded many, however, as gold is atypically rising alongside long-term rates and apparently disregarding a resilient US Dollar. Gold is widely viewed as an inflation hedge or safe haven asset, benefiting from intrinsic monetary properties that have held strong over thousands of years as sovereign authorities in control of national currencies tend to debase their value over the long-term.

That is exactly what happened in 2020 – 2021 when the Federal Reserve embarked on the most aggressive campaign of quantitative easing (QE) in its history, expanding its balance sheet by almost $5.2 trillion in a period of less than three years. That heralded a strong run-up in gold prices to what was considered record highs at the time. Because the Fed failed to act as ultra-easy policies ran on for far too long, inflation ran rampant in the US and global economies until benchmark rates finally started climbing just over two years ago. The Fed now finds itself in another difficult situation in deciding when to begin trimming rates.

If policymakers decide to cut, they could certainly risk undoing some of the progress they’ve made on price growth throughout the past two years, which would likely result in a return to rate hikes much sooner than policymakers have projected for, but keeping rates on hold could create the inverse of what got them into this inflationary situation – a stubborn pause on rates that left them way behind the eight ball when price growth got totally out of control.

Gold investors, by contrast, may see the metal headed toward a beneficial “win-win” situation, catalyzing the current rally. In addition to the obvious potential for a rebounding inflation in the wake of rate cuts, such a move at the Fed could also boost gold’s shine by…