We would forgive them for missing out on the beginning of the rally because, historically, gold prices fall when real interest rates rise, unlike how they have over the last few years. But we have been surprised by the commitment to that method of allocating to gold in the face of such a significant and sustained increase in gold demand by foreign central banks, which has driven prices instead of interest rates.
While ETF investors sold 750 tons of gold in the last two years, central banks bought nearly three times as much or 2100 tons. Purchases may continue well into the future. Emerging economy central banks hold an average of 6% of foreign exchange reserves in gold, while developed economy central banks hold an average of 12%.2 The increase in demand by foreign banks helped gold prices rise by 59% over the last two years.3
Invites sent
Are ETF investors waiting for a personalized invitation to buy gold and participate in this rally? They may have received one through Federal Reserve (Fed) Chairman Jerome Powell's testimony to Congress on July 9 and 10. 4,5
Powell’s comments imply that the Fed is close to cutting policy interest rates for the first time since July 2019.6 The prepared statement notes a labor market that has returned to more normalized conditions that existed just before the pandemic, and inflation is at 2.6% – closer to the 2% long-run target.5 Powell said, "We are not just an inflation-fighting bank; we have an employment mandate," referring to the responsibility to keep the US economy at full employment levels and inflation low. He went on to say, "Risks are not just coming from inflation … unemployment rising would be a problem."7 Holding rates too high or for too long would threaten economic growth and jobs.8 He appears justified in worrying about economic growth.
A day late and a dollar short?
In our recent outlooks and webinars, we have noted that the Fed, by waiting to be 100% sure a rate cut is needed, runs the risk of being 100% late with the first interest rate cut and may need to cut more than the market expects.
Early signs of consumer stress
There are early signs of consumer stress. Credit card delinquencies have risen from 1.5% in Q3 2021 to 3.1% in Q1 2024, auto loan delinquencies have risen from 1.54% in Q4 2021 to 2.78% in Q1 2024, pandemic-era excess savings have been spent falling from $2.1 trillion in August 2021 to zero by March 2024.9,10,11
This data indicates the possibility of an increase in consumer spending discipline, a baby step toward a slowdown in economic growth.
Should the Federal Reserve cut policy rates, ETF investors may see a Fed funds rate cut as effectively inviting them to buy more precious metals if they continue to use interest rate moves to guide gold allocation decisions (Rates up, sell gold, followed by the corollary: rates down, buy gold).
Awaiting RSVPs
Bond markets were quick to take the new information from the Fed onboard and have raised the odds of a cut in September to 90% and the potential for three rate cuts in 2024 to 50%.12
ETF investor demand for precious metals can be significant and can drive prices. Over the last two years, there have been short periods when ETF investors stopped selling, removing one source of gold supply from the market and raising the price. From November 2022 to January 2023, ETF investors significantly slowed the selling pace (600,000 ounces) while central banks continued to buy, causing the gold price to rise 19%.13
Real interest rates' effect in the past
With Powell signaling the beginning of a rate-cut cycle soon, how did precious metals react to the last three Federal funds’ cutting cycles? The last three Federal funds rate cycles – returns starting at the previous rate hike – beginning at the pause in 2000, 2006, and late 2018 (Table 1):
Table 1. Precious metals’ returns per the last three Fed funds’ cutting cycles[14,15,16,17]
Source: abrdn Investments, Bloomberg. Note: Gold price returns 5/25/2000–3/31/2004, 6/19/2006–8/22/2011, and 11/30/2018–8/6/2020. Silver price returns 5/24/2000–4/6/2004, 6/15/2006–8/19/2011, and 11/19/2018–8/10/2020. Platinum price returns 5/23/2004–4/12/2004, 6/13/2006–3/5/2008, and 12/13/2018–2/15/2021. Palladium price returns 5/25/2000–1/26/2001, 6/20/2006–2/16/2011, and 12/3/2018–5/3/2021.
Final thoughts
ETF investors have ignored the structural increase in gold demand by foreign central banks and a 59% rise in gold prices since the end of 2019. Will they also ignore a potential interest rate cut, which led to significant price rises in gold, silver, platinum, and palladium during the last three Fed fund cycles? If so, they can't say they weren't invited to the party; the invitations went out this week.
1 "Precious metals: Don’t miss the silver ETF invitation." abrdn Investments, March 2024. https://www.abrdn.com/en-us/investor/insights-and-research/precious-metals-dont-miss-the-silver-etf-invitation.
2 "China Gold Buying Slows as Reserves Grow for 18th Straight Month." Bloomberg, May 2024. https://www.bloomberg.com/news/articles/2024-05-07/china-s-gold-buying-spree-extends-to-18th-straight-month.
3 Bloomberg gold price return 12/31/2019–7/11/2024.
4 Federal Reserve (Fed) refers to the central banking system of the United States.
5 Semiannual Monetary Report to Congress delivered July 9, 2024, to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate; and July 10, 2024, to the Committee on Financial Services, U.S. House of Representatives. https://www.federalreserve.gov/newsevents/testimony/powell20240709a.htm.
6 Bloomberg Federal funds rate upper lower bounds 1/1/2000–7/11/2024.
7 "Powell Stresses Message That US Job Market Is Cooling, a Possible Signal of Coming Rate Cut." US News, July 2024. https://www.usnews.com/news/us/articles/2024-07-10/powell-stresses-message-that-us-job-market-is-cooling-a-possible-signal-of-coming-rate-cut.
8 "Cutting interest rates ‘too late or too little’ could hit jobs, Fed chair warns." The Guardian, July 2024. https://www.theguardian.com/business/article/2024/jul/09/jerome-powell-us-federal-interest-rate#.
9 Delinquency Rate on Credit Card Loans, All Commercial Banks. FRED Economic Data. Federal Reserve Bank of St. Louis, July 2024. https://fred.stlouisfed.org/series/DRCCLACBS.
10 Bloomberg/Equifax Auto loan delinquencies 90+ days 3/31/2009–3/31/2024.
11 "Pandemic Savings Are Gone: What’s Next for U.S. Consumers?" Federal Reserve Bank of San Francisco, May 2024. https://www.frbsf.org/research-and-insights/blog/sf-fed-blog/2024/05/03/pandemic-savings-are-gone-whats-next-for-us-consumers/.
12 "June price drop may shorten the Fed's last mile on inflation." Reuters, July 2024. https://www.reuters.com/markets/us/traders-boost-bets-fed-rate-cut-sept-after-cpi-data-2024-07-11/.
13 Bloomberg: ETF gold holdings 11/4/2022–1/24/2023, and gold prices 11/4/2022–1/24/2023.
14 Bloomberg gold price returns 5/25/2000–3/31/2004, 6/19/2006–8/22/2011, and 11/30/2018–8/6/2020.
15 Bloomberg silver price returns 5/24/2000–4/6/2004, 6/15/2006–8/19/2011, and 11/19/2018–8/10/2020.
16 Bloomberg platinum price returns 5/23/2004–4/12/2004, 6/13/2006–3/5/2008, and 12/13/2018–2/15/2021.
17 Bloomberg palladium price returns 5/25/2000–1/26/2001, 6/20/2006–2/16/2011, and 12/3/2018–5/3/2021.
Important information
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Trading in commodities entails a substantial risk of loss and is not suitable for all investors.
Diversification does not eliminate the risk of experiencing investment losses.
Prospectuses for abrdn Physical Gold Shares ETF, abrdn Physical Palladium Shares ETF, abrdn Physical Platinum Shares ETF, abrdn Physical Precious Metals Basket Shares ETF and abrdn Physical Silver Shares ETF
Projections are offered as opinion and are not reflective of potential performance.
Projections are not guaranteed, and actual events or results may differ materially.
ALPS Distributors, Inc. is the marketing agent.
There are risks associated with investing including possible loss of principal.
ALPS is not affiliated with abrdn.
ETF002226 11/30/24
AA-150724-180669-3