by Craig Hemke, Sprott Money:
Last week, the FOMC cut the fed funds rate by fifty basis points and indicated that more cuts will come later this year and next. What does this signal for precious metal prices in the short and long term? Let’s discuss that this week.
Impact of Rate Cuts on Gold Prices and Silver Prices
The immediate reaction to the rate cut news has been complicated. The U.S. dollar index dropped and then rallied before dropping again toward important support. Conversely, gold prices rallied then fell before rallying again and finishing the week at all-time highs. This is all very interesting, but perhaps the most telling response came from the bond market, where long-term rates have moved higher in response to the Fed’s cut of short-term rates.
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Could this move up in long-term rates be a signal that bond traders are uneasy about the prospects of lower inflation in the months ahead? This presents an interesting conundrum for Jerry Powell and his Fed. If price inflation returns while he aggressively cuts short rates to forestall a recession, the setup for negative real (inflation-adjusted) rates becomes quite positive for gold prices.
And just how aggressive might the Fed be with their rate cuts? As you can see below, the FOMC members all seem to agree that there will be at least an additional 50 basis points in cuts this year with 100 more basis points in cuts in 2025. That would take the fed funds rate down to a range of 3.25-3.50% by the end of next year.
And this is what the fed funds futures market is seeing as well. In fact, this market is actually looking for as many as six cuts, or 150 basis points, in 2025.
In the short term, the key market to watch might be that U.S. dollar index. In the aftermath of the FOMC meeting, it has been rangebound and finding support near 100.50.
How the U.S. Dollar Index Affects Precious Metals Markets
But what happens if 100.50 gets taken out and the index begins to trade in double digits? As you can see below, any weekly close below 100 opens the possibility of a further drop toward 96 or even 94. What would a 5% decline in this index do for COMEX precious metal prices?
