Goldman says gold could fall if the Fed opts for a quarter-point cut

(Bloomberg) — Gold (GC=F) could face a minor short-term setback if the Federal Reserve opts for a cut of just 25 basis points this week, but the metal will later rally to a record, helped by rising flows into bullion-backed exchange-traded funds, according to Goldman Sachs Group Inc.

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“Fed rate cuts are poised to bring Western capital back into gold ETFs, a component largely absent from the bull run seen in gold over the past two years,” analysts Lina Thomas and Daan Struyven said in a note, reiterating the forecast bank growth 2,700 dollars an ounce until the beginning of next year.

The precious metal has been one of the strongest performing major commodities this year, rising by about a quarter and hitting successive records as central banks boost buying and traders look ahead to the Fed’s pivot to monetary easing. Investors remain divided on whether the US central bank will begin its easing cycle this week with a half-point cut or, as Goldman Sachs expects, a more modest 25 basis point cut.

“While we see a tactical decline in gold prices on our economists’ base case of a 25-basis-point Fed rate cut on Wednesday, we expect a gradual increase in ETF holdings—and thus gold prices—throughout the cycle Fed easing,” analysts said. “Since ETF holdings only grow incrementally as the Fed tapers, this advantage is not yet fully realized,” they added.

Global holdings in bullion-backed ETFs have rebounded in recent months after sinking in mid-May to the lowest level since 2019, according to a Bloomberg balance sheet. Despite gold’s sustained rally, they remain lower year-to-date and about 25% below the peak set during the pandemic in 2020.

Because ETFs are backed by bullion, the inflows “reduce the physical supply of gold available in the market,” analysts said.

Spot gold was last little changed near $2,585 an ounce. Silver (SI=F) — which can track the movements of the more expensive precious metal — gained as much as $31 an ounce, rising for a seventh day and on course for its longest winning streak of 2019.

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