The price of gold has been reaching new record highs almost every few days. What’s behind this rally, and what to expect for the precious metal moving forward, especially given the upcoming FOMC rate decision?
Well, we all know how this latest bull run got started this year: tariffs. Specifically, the prospects of how US tariffs shifted market expectations dramatically in the US and led to three major changes: the US dollar, inflation expectations (at least the narrative around it), and growing concerns over an economic downturn. For gold enthusiasts, all three changes meant one thing so far this year: Ka-ching!
Since Trump started his 2.0 Trade War – in which he imposed high tariffs on many countries, most notably China – the main narrative of many economists has been that this trade war will have a dire effect on the US economy, raise inflation expectations, and increase the chances of a recession this year.
But how are things looking so far?
When it comes to inflation, things aren’t looking good, but they are, for now, not as terrible as many expected. The recent CPI report showed an annual rate of 2.9% for the headline figure and 3.1% for the CPI excluding food and energy. Even inflation expectations, as shown in the chart below, remain anchored around 2.3%, the same as they were back in December 2024.
5-Year, 5-Year Forward Inflation Expectation Rate
Source: FRED
But markets heavily rely on the current inflation rate to extrapolate what the inflation would be in the future. Thus, they don’t tell us a lot more than the current inflation reading does. Despite concerns over the possible ramifications of tariffs on inflation, Jay Powell, Chair of the Federal Reserve, remains on course to cut rates by 25 basis points this month, especially after Jackson Hole, where he gave the green light for a September rate cut. Beyond that, it will be anyone’s guess.
The rate cut comes as the labor market is showing clear signs of weakness: The latest jobs report indicated that only 22k jobs were added last month, and a total of 88k in the past three months, combined.
And finally, since the beginning of the year, the trade war talk has already weakened the US dollar against major currencies; e.g., the Euro/USD has increased by 12.6% YTD, which only further boosted the price of gold.
What’s next?
The main event to move markets will be the upcoming FOMC decision and press conference that will take place on September 17. Powell isn’t likely to surprise markets and will try to keep them guessing about future rate cuts. Some analysts thought he might surprise with a 50 bp rate cut, but at this point, it seems highly unlikely, albeit not impossible. According to Fed Watch’s latest data, the chances are around 8%.
Source of data: CME Group
A rate cut is still likely to help fuel the frenzy over the possible rise in inflation, and may further weaken the US dollar – all factors that are likely to benefit the gold market.
Disclaimer: The views expressed are for informational purposes only and should not be considered investment advice. Please do your own research before making financial decisions.
