Goldman Sachs Predicts Short-Term Gold Dip If Fed Implements Quarter-Point Cut

Gold (GC=F) could face a slight short-term decline if the Federal Reserve decides to implement a 25-basis-point cut this week, according to Goldman Sachs Group Inc. However, the investment bank predicts a significant rebound, with gold prices potentially reaching record highs. This anticipated rally is expected to be fueled by rising investments in bullion-backed exchange-traded funds (ETFs).

Impact of Fed Rate Cut on Gold Prices

Goldman Sachs analysts Lina Thomas and Daan Struyven suggest that a modest quarter-point rate cut by the Federal Reserve could initially pressure gold prices. Despite this potential dip, they project a subsequent surge in gold prices, forecasting an increase to $2,700 per ounce by early next year. This upward movement is anticipated to be supported by a resurgence in Western capital flowing into gold ETFs, which have been relatively underrepresented in the recent gold rally.

Current Gold Performance and ETF Holdings

Gold has been one of the top-performing major commodities this year, appreciating by approximately 25% and setting new records as central banks increase their gold purchases. The market is currently divided on whether the Fed will initiate its easing cycle with a 50-basis-point cut or a more conservative 25-basis-point reduction, as Goldman Sachs expects.

While the bank acknowledges potential short-term downside for gold prices with a 25-basis-point cut, they remain optimistic about a gradual increase in ETF holdings and gold prices over time. According to the analysts, this potential upside is not yet fully reflected in current gold prices.

Recent Trends in Bullion-Backed ETFs

Global holdings in bullion-backed ETFs have recently rebounded after a significant decline in mid-May, reaching the lowest levels since 2019. Despite gold’s impressive performance, ETF holdings are still approximately 25% below their peak during the pandemic in 2020. As ETFs are backed by physical gold, increased inflows help reduce the available gold supply on the market, which can drive prices higher.

Learn more about the role of ETFs in the gold market in our Bullion-Backed ETFs Explained article.

Silver’s Performance

Spot gold prices remain relatively stable, hovering around $2,585 per ounce. Meanwhile, silver (SI=F), which often mirrors movements in gold, has seen gains towards $31 per ounce. Silver has been on an upward trajectory for seven consecutive days, marking its longest streak of gains since 2019.

Summary

Gold is expected to face a short-term setback if the Federal Reserve implements a quarter-point rate cut, but Goldman Sachs forecasts a significant rally in the metal’s price driven by increased ETF inflows. As global holdings in bullion-backed ETFs rise and gold prices adjust, investors should stay tuned for potential record highs in the near future.