Interest Rate Cut Incoming! How to Position in Gold and Silver?

Interest rate cuts are finally about to begin!

For precious metals, does a rate cut mean a rise?

Does a rate hike mean a fall?

At first glance, it seems reasonable, but in fact, the expectation of rate cuts has already been partially reflected in the market.

This time, the market has also seen a recession expectation.

How to position gold and silver this time?

Historical data shows that gold prices usually rise broadly 1-3 months before the Federal Reserve cuts interest rates.

For example, during some bull markets for gold (such as 1970-1982, 2000-2019), the average maximum increase in gold prices before rate cuts reached 19% and 6% respectively.

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The peak in gold prices before rate cuts generally leads the first day of rate cuts, leading by 1-42 days, with an average of 11 days.

This indicates that the market's reaction to the expectation of rate cuts may be reflected in advance in the price of gold.

Within half a year after the rate cut, the probability of gold prices rising is relatively large, with an average increase of 7% in the first 90 trading days after the rate cut, and an average increase of 10.8% in the first 180 trading days.

Gold, as a safe-haven asset, is usually favored by investors under the expectation of the Federal Reserve's rate cut.

When the expectation of rate cuts is strengthened, gold prices tend to rise as investors seek safe-haven assets to protect the value of their assets.

Generally speaking, the Federal Reserve's rate cuts usually reduce real interest rates, increasing the attractiveness of investing in gold, thereby having a positive impact on gold prices.

First, after the rate cut, it will reduce the cost of holding gold.

Gold itself does not generate interest, and when the Federal Reserve cuts interest rates, causing real interest rates to fall, the opportunity cost of holding gold decreases.

This makes gold more attractive relative to interest-bearing assets (such as bonds, bank deposits, etc.

), which may drive up gold prices.

Second, in a low-interest-rate environment, investors may seek alternative investment channels to obtain higher returns or to preserve and increase the value of their assets.

Gold, as a safe-haven asset, will thus become more attractive.

Third, the depreciation of the dollar will increase the price of gold.

A decrease in interest rates usually causes the dollar to depreciate relative to other currencies.

Since gold is priced in dollars, the depreciation of the dollar will increase the price of gold.

This is because when the dollar depreciates, the purchasing power of other countries' currencies increases, and investors need to pay less of their own currency to buy the same amount of gold.

Fourth, the depreciation of the dollar may prompt investors to reduce their investment in dollar assets and instead increase their investment in safe-haven assets such as gold, further driving up gold prices.

Fifth, the Federal Reserve's rate cuts often occur when the economic outlook is uncertain or the risk of economic recession increases.

In this case, the market's risk aversion will increase, and investors may seek safe-haven assets to protect the value of their assets.

This time it might be a bit different.

During the Mid-Autumn Festival holiday, the foreign gold and silver markets saw a significant increase, mainly catalyzed by the European Central Bank's "hawkish rate cut" which suppressed the US dollar index, and the driving force lies in the expectations of the US's monetary and fiscal policies: currently, the US's monetary and fiscal policies show a trend of "dual easing" expectations.

In terms of monetary policy, the Federal Reserve is about to carry out substantial rate cut operations in this week's interest rate meeting; in terms of fiscal policy expectations, the CBO has raised its expectations for this year's fiscal deficit in its latest report.

Both presidential candidates have shown expectations of a loose fiscal policy, with Trump hoping to extend the employment and tax cut bills implemented in his last term, and Harris advocating for the implementation of a housing subsidy plan.

In the medium term, the US fiscal deficit is difficult to control effectively and will continue to expand.

The expectations of monetary and fiscal policies will provide strong support for gold prices, and the strategy is to suggest buying on dips.

Silver, influenced by the price of gold, tends to be strong, but its visible inventory level does not reflect its shortage expectations.

The nature of silver as an industrial metal also means that its price will be affected by the expectation of overseas recession.

There is a certain upward space in the gold-silver price ratio, and the strategy for silver is to suggest temporarily watching.