The Time Has Come

Federal Reserve Chairman Jerome Powell delivered the long-anticipated message that the markets had been waiting for last week at Jackson Hole: the time has come to cut interest rates. The only remaining question now is how aggressive the initial September cut will be. Yahoo Finance reports that “Markets are pricing in a 36.5% chance the Fed cuts by 50 basis points by the end of its September meeting, up from a 24% chance.”

Even if the Fed only cuts by 25 basis points initially, Powell hinted that a series of cuts would likely follow. 

So, what does this mean for gold and silver?

The metals' initial reaction to Powell’s announcement last week was positive. Gold continued its recent rally, closing above USD $2,500 per ounce on Friday, where it remains at the time of writing. Silver also benefited, bouncing above $30 per ounce for the first time since mid-July. 

That said, the metals market had priced in a September cut long ago, so my expectation is that the current bounce will be short-lived. The longer-term benefit for the metals will come from reduced interest rates on competing term deposits and GICs, which compete with gold and silver as financial products investors use for long-term wealth preservation. 

However, gold and silver will have also have to compete with a surging U.S. equities market, which remains hot and will likely benefit from the same rate cuts. 

The US Dollar Index has declined by 3.63% in the last 30 days, which is also beneficial for dollar-priced assets like gold and silver. The index still has about another 5% to go before returning to its historical norm. 

Meanwhile, Israel and Hezbollah exchanged rocket attacks over the weekend, raising geopolitical risks in the region, although peace talks continue.

Sources: Yahoo Finance, Marketwatch