Gold Seen Cracking $1,600 as Fed Goes for Cut, Cut, Cut, Cut

Gold will surge above $1,600 an ounce as Fed embarks on a quartet of rate cuts to combat slowing U.S. growth, BNP Paribas says.

Ranjeetha Pakiam

05 Sep 2019, 06:46 AM IST

Gold Seen Cracking $1,600 as Fed Goes for Cut, Cut, Cut, Cut

An employee arranges two hundred and fifty gram gold bars, produced by Swiss manufacturer Argor Hebaeus SA, into a storage tray at Aranypiac Kft in Budapest, Hungary (Photographer: Akos Stiller/Bloomberg)

(Bloomberg) -- Gold will surge above $1,600 an ounce as the Federal Reserve embarks on a quartet of interest rate cuts to combat slowing U.S. growth and the fallout from the trade war with China, according to BNP Paribas SA, which flagged prospects for a significant rise in prices in the coming months.

Bullion will benefit as the Fed opts for four, 25 basis point cuts between this month and June 2020, Harry Tchilinguirian, head of commodity research, said in a note. As nominal yields fall with each reduction, “real rates will move and stay in negative territory, raising the appeal of holding gold,” he said.

Gold has soared this year on increased demand for havens as the U.S.-China trade war damages global growth, prompting central banks including the Fed to adopt a more accommodative stance. In July, U.S. policy makers reduced borrowing costs for the first time in more than a decade, and they are widely expected to do so again at their Sept. 17-18 meeting. Against that backdrop, investors have boosted holdings in bullion-backed exchange-traded funds.

“The trade war is unlikely to be resolved quickly,” Tchilinguirian said. “In this context, gold has resumed its traditional role as a safe-haven asset” and holdings in ETFs are now heading toward peak levels seen in 2012, he said as BNP boosted price forecasts for this year and next.

Forecasts Raised

Gold will average $1,400 an ounce in 2019, up $60 from an earlier forecast, and $1,560 in 2020 following a rise of $130 in the outlook, BNP said in the note. The Fed’s easing cycle should push average prices above $1,600 in the first quarter of 2020, it said, adding: “We expect gold to rise significantly.”

For more stories on the outlook for gold, interest rate policy:
Fed’s Rosengren Sees ‘No Immediate’ Easing Needed Despite Risks Will They Help, Hurt or Do Nothing? Central Banks Face Backlash Gold ETFs Inflows Top 100 Tons in August as Havens Triumph Gold Bulls Rejoice as Negative Real Rates Pave Way for Rally

Spot gold traded at $1,540 an ounce on Wednesday, up 20% this year. Prices hit $1,555.07 on Aug. 26, the highest level since 2013.

The four cuts would reduce the upper bound on the Fed’s benchmark rate to 1.25%, in line with current forward rates at 1.2%, Tchilinguirian said. The U.S. central bank “has acknowledged that risk mitigation relative to foreign conditions is part and parcel of its decision-making process.”

Investors will get more insight into monetary policy this week, with the New York Fed’s John Williams set to speak on Wednesday followed by Chair Jerome Powell on Friday. On Tuesday, Fed Bank of Boston President Eric Rosengren said the U.S. economy remains “relatively strong” despite heightened risks.

To contact the reporter on this story: Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net

To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Jake Lloyd-Smith