The New Rate Cut Cycle

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.

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? 

So, let's close with those COMEX precious metal prices and try to discern where they may head from here. As I type this on Monday, the prices of COMEX gold and spot gold have both just made new all-time highs. This is nice. But as longtime readers of these weekly articles will recall, it's never how you begin the week that matters. How you end the week is far more important. Last week ended quite well, and that's what led to today's rally. But what about this week?

This area around $2650 has been targeted as a major resistance level. In our monthly videos here at Sprott Money, Chris Vermeulen and I have been mentioning this level since the breakout began back in April. So, is this it? And is this as far as price can go for now? Probably not, but watch price this week just in case.

The biggest risk to the gold price in the near term is probably the stock market. If stocks run into another October swoon, look for COMEX gold futures to feel the impact of forced liquidations and profit-taking. The latest Commitment of Traders report revealed some of the largest speculator and hedge fund long totals in recent memory, and those positions might be easily liquidated in the event of a global stock market margin call.

The COMEX silver price is still trading below its highs from back in May. It's doing better, however, and just last week was finally able to break through the downtrend line that has contained it for months. More weakness in the U.S. dollar index would benefit silver greatly, so that's another reason to keep an eye on that chart in the days ahead. For now, COMEX silver needs to make another higher high in its recovery and then move to challenge those May highs. From there, a move to $35-$36 remains a possibility IF it can break through $33. 

One more thing. This is the final week of September, and the monthly and quarterly charts will be painted next Monday, the 30th. As such, these are significant days for price as those long-term charts are important in terms of driving additional institutional interest for gold and silver. Let's hope we can sustain the current momentum and finish the month strong.

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