Fed cuts rate by 0.5%, gold rises

The United States Federal Reserve lowered its benchmark interest rate by 50 basis points to a range of 4.75% to 5% on Wednesday as the majority of analysts expected. Gold rose and the combination may help the metal’s producers, experts said. 

The move to cut the rate by 50 basis points instead of 25 basis points, as some analysts forecasted, indicates a shift in focus away from inflation to tackle an uptick in the U.S. unemployment rate to 4.2%.

Some bankers on the Fed rate committee want aggressive cuts to prevent rapid jobless increases. Others wanted a slower pace to ensure high inflation is soundly defeated in case there’s a surprise jolt to the economy that causes prices to rise again.

“Our patient approach over the past year has paid dividends,” Federal Reserve board chairman Jerome Powell said in Washington, D.C. But now “the upside risks to inflation have diminished, and the downside risks to unemployment have increased.” 

The economy “has cooled from its formerly overheated state,” he said, with inflation in August down to 2.5% from 7.1% in 2022. “The labour market is not a source of elevated inflationary pressures,” he said, mentioning how wage gains were slowing and not expected to prod inflation higher.  

Labour focus

In making the first interest rate cut since early 2020, Powell cited revised job numbers from the Bureau of Labor Statistics last month that showed the U.S. economy added about 818,000 fewer jobs in 2023 and early 2024 than initially reported. 

U.S. hiring in August added 142,000 jobs, which was better than June and July, but down from 210,000 jobs in August last year, leading some analysts to warn of a potential recession ahead.

From a historically low point near 0% in March 2022, the Fed raised the rate 11 times over 16 months to July last year to combat inflation. It had been sitting at 5% to 5.25% for more than a year.

Gold price

The gold price rose 1.1% to US$2,580.50 per oz. after the announcement compared with Tuesday, gaining US$10 an oz. from just before the decision on Wednesday.

“Lower rates should positively impact gold equities by lowering their cost of capital and boosting the price of the gold, which will increase the value of their properties,” Ryan McIntyre, managing partner at Sprott, told The Northern Miner by email.

“The Fed’s rate decision should be positive in closing the disconnect between gold equities’ valuations and the gold price,” he said. “Gold companies are now in a situation where they have a cheaper cost of capital and a more valuable asset base. The combination together can be very powerful.”

Matthew Jones, analyst at London-based precious metal bar trader Solomon Global, said the price could move higher as investors consider how lower interest rates signal a weakening economic outlook, prompting them to seek safe-haven assets like gold. It also lowers the opportunity cost of holding non-yielding assets like gold, he said.

“Historically, rate cuts have correlated with rising gold prices,” Jones said by email. “For example, during the 2008 financial crisis and the COVID-19 pandemic in 2020, the Fed’s rate cuts were followed by significant increases in gold prices.”

Liechtenstein-based gold fund manager Ronald-Peter Stöferle foreshadowed Jones’ comments when he spoke last week with The Northern Miner in Colorado Springs, Col. He said he also expected some short-term volatility following the forecasted cut. While the market has been pricing in the reduction, there could be a dip in gold prices afterward as traders take profit, the fund manager said.

Barrick CEO

At the same conference, Barrick Gold (TSX: ABX; NYSE: GOLD) CEO Mark Bristow said gold company stock prices have been disconnected from the metal’s spot price as investors shifted from exchange-traded funds (ETFs) and gold equities towards physical gold for risk protection.

“We’ve seen the move initially away from ETFs and even a softening of equities and a real focus on the physical gold, and that pushed the gold price all the way from US$2,400 up into US$2,500s,” Bristow said.

“The big question is, when do people start looking to gear that exposure to gold, and that means you go back into the trading platforms that the ETF offers,” the CEO said. “And of course, equity has got real value.”

Debt impact

The Fed can cut the rate to stimulate the economy, by making money less expensive to borrow, and also because rates don’t need to be as high as they have been to control inflation. While analysts had widely expected the cut and more ahead, the half-percentage-point cut may indicate the Fed is on a quick pace to lower rates.

However, The Economist magazine notes many companies may only start to feel higher rates now because they secured pandemic-era three- to five-year borrowings in 2020 and 2021 before the rate hikes began. Many of those American fixed-rate deals are set to expire soon, with US$2.5 trillion in debt to be refinanced by 2027 including US$700 billion next year and US$1 trillion in 2026, the magazine said this month.  

Typical non-financial company loans ending in 2025 averaged an 3.8% interest rate, but now may have to be refinanced at around 6%, it said. Lenders charge the Fed rate plus their own levies and fees.

Companies entered the rate-tightening cycle flush with cash because the pandemic sidelined investment plans. And they benefited from higher interest rates expanding their holdings. Net interest payments fell 35% when they would normally have increased by 50%, according to The Economist.

With files from Henry Lazenby.