Monthly gold update

Gold: Spotlight on September’s performance

Gold ended September at US$2,635, up 5.2% on the month and closing at a price just off the record high set a few days earlier. The main driver during the month was the Fed’s 50 basis point rate cut, which was only a surprise in terms of the size of the reduction, while stimulus measures in China were also beneficial. Escalations in the wars both in Ukraine and, perhaps in terms of a more immediate impact, the Middle East were also supportive of the perceived “safe haven” asset.

For the quarter, gold has risen 13.2%, and 27.7% year to date, making it one of the year’s best-performing assets. Globally, the quantity of physical gold held by exchange-traded products increased in September for the fourth-straight month.

The gold price remained relatively flat but well-supported in the initial part of the month, ahead of the Fed’s FOMC meeting. Consumer Prices for August came out below expectations, with the 2.5% annual pace of inflation the lowest since February 2021. Shelter costs remained the outlier, rising to 5.2% from 5.1%. The overall inflation numbers, however, provided fuel for the Fed’s rate decision.

The 50-basis-point (bp) cut surprised the majority of the market who had expected a more conservative 25bp reduction. Fed Chair Powell was quick to play down any notion that such large cuts are to become the norm, describing this as a “recalibration” of the Fed’s policy, and a further 50bps in total is likely by the end of 2024 (25bps in each of the November and December meetings).

Gold broke through $2,600 on 20 September, shortly after the Fed’s rate cut announcement, and proceeded to hit an all-time high of $2,685 on 26 September. The gold price eased in the final days of the month on the back of the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measurement of inflation. While core PCE was below consensus estimates, personal income and spending were both lower than expected, signalling a slowdown in the economy. 

Real yields declined in the month by just over 15bps to 1.59%. Treasury yields fell in the lead-up to the Fed meeting but actually reversed ground after the rate announcement. This behaviour post-announcement could be evidence that investors accept Chair Powell’s “recalibration” messaging and are thus stepping back from expecting more aggressive rate cutting in the coming months. Powell suggested the economy remains healthy and employment solid, but the Fed wanted to get ahead of any weakness in the employment market.

The 10yr-2yr constant maturity yield differential that we highlighted in our update last month (back to flat, having been negative since July 2022) is now in positive territory, signalling a more optimistic outlook for US economic conditions. 

The US Dollar weakened further, by 0.9% in September, as measured by the DXY index. The larger-than-expected Fed rate cut, coupled with contrasting projections from some other central banks, has driven the USD lower against currencies including the British pound. Fed Funds futures at the end of the month were pricing in a more aggressive path for US interest rates than what was suggested in Chair Powell’s statement after the September FOMC meeting and what is implied by the latest Fed dot plot.

Keep an eye on …

Now that the long-awaited first Fed rate cut is behind us, the market should be more tightly focused on events in the Middle East and the US elections in November, both of which could have a significant impact on the gold price. Gold’s perceived “safe haven” status could be attractive in an environment of heightened conflict and political uncertainty. The next Fed meeting is scheduled for after the US election, by which time committee members could have more clarity on inflation and the employment market.