Gold (XAU) Price Forecast: Will a Super-Sized 50-bp Fed Rate Cut Push Gold to $2,600?

Gold Surges to Record High as Fed Rate Cut Speculation Intensifies

This week, gold (XAU/USD) prices hit all-time highs, closing at $2,573 per ounce, as traders ramped up bets on the U.S. Federal Reserve cutting interest rates next week. The metal surged over 3.25%, marking its strongest weekly gain since mid-August. The dominant driver has been expectations that the Fed might deliver a larger-than-expected rate cut to stimulate the economy, further weakened by rising inflation concerns and global economic uncertainty.

Rate Cut Expectations Boost Gold

Market participants now see a nearly 50% chance of a 50-basis-point rate cut, up from 14% earlier in the week​​. Comments from former Fed officials and the market’s appetite for deeper cuts have intensified speculation that the Fed may take more aggressive action. This has fueled gold’s rally, with lower rates generally increasing the appeal of non-yielding assets like gold.

U.S. Dollar and Bond Yields Support Gold’s Rise

Despite the rally in gold, the U.S. Dollar Index gained slightly this week, closing at 101.114 with a 0.07% increase​. However, the expectation of future rate cuts tempered the dollar’s momentum, keeping gold prices strong. Additionally, bond yields fell, with the 10-year Treasury dropping 2.1 basis points​. As bond yields decline, the opportunity cost of holding gold diminishes, bolstering its attractiveness as a safe-haven asset.

Global Monetary Easing and Central Bank Demand Drive Gold Higher

The European Central Bank (ECB) also cut interest rates this week, contributing to global monetary easing and reinforcing gold’s strong uptrend​. Central banks, particularly in emerging markets, have been increasing their gold reserves, further supporting prices. With the Fed likely to follow suit, the demand for gold is expected to remain robust in the short term.

Next Week’s Forecast: Fed Meeting in Focus

Looking ahead, all eyes are on the Federal Reserve’s policy meeting scheduled for next Tuesday and Wednesday. The market widely expects a rate cut, marking the Fed’s first reduction since 2020. While the consensus is for a 25-basis-point cut, there remains a significant 49% chance of a larger 50-basis-point reduction​. A larger cut would likely drive gold prices higher, potentially pushing them towards $2,600 per ounce​.

Moreover, the Fed will provide updated projections on future rate cuts, which could signal further monetary easing through 2024. The Fed’s success in bringing inflation near its 2% target while avoiding a severe recession will be pivotal in determining its next moves. If inflation continues to moderate and the labor market weakens, additional cuts could be on the horizon, further supporting gold’s bullish outlook​.

In the short term, the forecast remains bullish, with gold likely to test new highs depending on the Fed’s actions. Traders should closely monitor the Fed’s statements for indications of further easing, which would support a continuation of gold’s record-breaking run.