How does gold perform after the Fed cuts interest rates?

Gold prices are reaching new heights, hovering around record levels of US$2,516 per ounce. This surge comes amid growing expectations that the Federal Reserve will cut interest rates by 25 or 50 basis points in September.

Soaring gold prices have led to a remarkable turnaround for local gold miners, following a prolonged period of poor earnings, rising costs, and high capital expenditure commitments.

For example, Evolution Mining (ASX: EVN) reported Group cash flows of $367 million in FY24 compared to $116 million in outflows in FY23. It also reported:

• Underlying EBITDA +67% to $1.51 billion

• EBITDA margin +900 bps to 47%

• Net mine cash flow +1,533% to $583.7 million

• Underlying profit after tax +135% to $481.8 million

• Average gold selling price +23% to A$3,190 per ounce

With the Fed's September meeting approaching, let's examine how gold typically performs after the first rate cut in previous easing cycles.

Fed rate cut history

Since 1995, the Fed has undergone eight cutting cycles. Here's a summary of the first rate cut in each cycle:

After the first rate cut

These are the forward returns for gold after the first rate cut of the given cycle.

Source: Market Index

Source: Market Index

Key takeaways:

• On the day of the rate cut: Gold tends to rally, up an average 1.6% and positive 75% of the time

• Around the 1-month mark: Gold begins to struggle, down an average 2.5% and positive only 37.5% of the time

• By the 6-12 month mark: Returns are overwhelmingly positive, up more than 7.7% on average and positive more than 75% of the time

Key considerations

Defensive but not crisis-proof: While gold is often considered a defensive asset, it doesn't always perform well during periods of full-blown crisis. For example:

• During the Global Financial Crisis, gold prices fell almost 30% between March and October 2008

• During the Silicon Valley Bank collapse in Feb-Mar 2023, prices fell as much as 7%

• When the Japanese carry trade unraveled (2-8 August 2024), gold was down 2.5%

This pattern might explain the poor 1-3 month performance following rate cuts, as gold prices ease under pressures such as the Dot-com bust, GFC, US-China trade war (2019), and the onset of the pandemic.

Long-term recovery: As economic concerns and headwinds eventually subside, markets tend to stabilise. Fed rate cuts are typically accompanied by quantitative easing, which boosts liquidity in financial markets and encourages lending and investment. These conditions of ample liquidity and low interest rates generally act as tailwinds for gold prices in the longer term.

Federal Reserve total assets (Source :TradingView)

While gold prices may experience short-term volatility following a Fed rate cut, historical data suggests a tendency for stronger performance in the medium-to-long term. The big question for now is – Is there a left-field crisis brewing that could drive gold prices lower in the short term? Or will the upcoming Fed rate cut take place during a period of relative economic stability?