Gold & Silver: Fed Rate Cut Expectations Amid Market Volatility

Article Summary

• Gold and silver prices rise on Fed rate cut expectations.
• Impact of Fed officials' dovish comments on market sentiment.
• BCA Research's neutral stance on gold in the short term.
• Long-term bullish outlook for gold prices through 2026.
• Optimism regarding strong gold demand in India.
• Caution regarding silver due to potential economic risks.

In Asian trading on Friday, spot gold rose, buoyed by expectations of a December rate cut by the Federal Reserve, briefly touching $4190/ounce. Spot silver also gained over 1% intraday, nearing $54/ounce. With US markets closed for Thanksgiving, typically lower holiday trading volumes can amplify short-term price swings.

ANZ Research analysts noted in a research note that dovish comments from policymakers earlier in the week boosted market expectations for a Federal Reserve rate cut. They pointed out that swap traders are currently pricing in an 80% probability of a 25 basis point rate cut at the December meeting.

Meanwhile, investors continue to monitor the progress in the selection of the next Federal Reserve Chair. Hassett, a close ally of Trump, has reportedly emerged as a strong contender. Hassett is believed to be closely aligned with Trump's economic views, including the belief that interest rates should be lowered.

However, Roukaya Ibrahim, chief commodities strategist at BCA Research, stated in a recent interview with Kitco News that she is neutral on gold for the next three months due to the uncertainty surrounding Federal Reserve monetary policy.

While Fed Chair Powell is expected to push a rate cut decision through the Federal Open Market Committee (FOMC) at the next meeting, this could attract several dissenting votes. Powell will need to strike a delicate balancing act, with economists suggesting that the rate cut decision may be accompanied by hawkish rhetoric.

Ibrahim said that in this volatile environment, gold is expected to remain range-bound, but she added that longer term, she still expects gold prices to continue to rise through 2026.

"The moves of recent weeks suggest there's a fundamental bid for gold, that the market has a structural underpinning," she said. "Even if the Fed pauses on rate cuts in December, our base case is that they will continue cutting rates next year. Real rates will be lower, and that's particularly good news for gold."

While the Montreal-based research firm does not expect the economy to slip into recession next year, Ibrahim said that moderate growth will temper inflationary pressures, providing the Fed with room to cut rates.

"We are actually concerned about the growth environment, which is why we think the Fed will cut rates," she said.

Ibrahim said that in addition to the cyclical tailwinds supporting gold's long-term rise, investor and consumer acceptance of higher gold prices is providing additional support. She pointed to continued strong demand in India, one of the world's largest gold consumers.

While high gold prices have dampened jewelry demand, Ibrahim said investment demand for gold bars and coins has surged. Government trade data shows India imported $14.7 billion worth of gold last month, up 200% from $4.9 billion in the same period last year.

Meanwhile, Ibrahim expects central banks to continue buying gold to further diversify their foreign exchange reserves.

Although BCA Research is bullish on gold, Ibrahim is somewhat cautious on silver - which has outperformed gold this year and is testing resistance above $53/ounce.

Ibrahim explained that gold remains the primary monetary metal that investors and central banks will rely on in an environment rife with economic and geopolitical uncertainties. She added that the risk of slowing economic growth could impact industrial consumption of silver - which accounts for about half of the market.