Making sense of market moves
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We’ve discussed the effects of the Federal Reserve’s 50 basis point haircut on both the stock and the bond market. But we don’t want commodities to feel left out—especially because one in particular is absolutely outclassing both stocks and bonds.
Gold reached another new record high of $2,651 per ounce today, and has gained over 27% this year, keeping the commodity on track for its best annual performance in 14 years.
And analysts say the shiny metal is just getting started.
“While record high prices may dissuade some investors, we see several reasons why the rally still has room to run,” wrote UBS CIO Americas Solita Marcelli in a note today. She added that the firm’s price target for gold is $2,700 per ounce by the middle of 2025.
Why? The Fed’s rate cut path makes gold more attractive because the cuts are “lowering the opportunity cost of holding the non-yielding asset,” according to Marcelli. In layman's terms: Gold does not offer an annual yield like bonds, but becomes more attractive after rate cuts since bonds won’t yield as much anyway when rates are lower.
Marcelli also noted that heightened geopolitical conflict is a boon to gold, as investors seek a hedge against equities and currencies in a tumultuous market environment. Last but not least, demand for gold is still growing from institutional investors and central banks alike.
“Globally, central bank demand remains a major driver, with purchases reaching 14-year highs in 2022 and 2023, also underpinned by ongoing concerns about dollar-based assets and inflation,” explained Senior Market Strategist at the World Gold Council Joseph Cavatoni.
Beyond the golden goose
Gold isn’t the only metal set to gain from lower rates. According to Citi analysts, the median annualized returns for precious metals has been about 13% in the six months after the first Fed rate cut cycles all the way back to 1995.
The same analysts say silver should shine even brighter, with its current price of $31 per ounce set to rise between 20% and 30% by the end of the year for many of the same reasons that gold has gained, including demand from institutional investors.
Other commodities, like industrial metals aluminum, lithium, and copper, haven’t historically gotten as much of an interest rate-related boost as gold and silver. However, demand for these metals is also increasing due to their part in building AI hardware (yes, all roads lead back to AI somehow).
While mixing metals may be a fashion faux pas, it’s a good look when it comes to your portfolio.—LB