Analyst: Rate cuts good for gold, but not too fast

Precious metals traders are looking less toward whether the Federal Reserve will cut interest rates and have instead begun analyzing how exactly the fed will accomplish economic easing.

Phil Streible, chief market strategist at Blue Line Ventures, told Kitco News on Tuesday that a longer period of interest rate cuts would be beneficial to those holding gold.

The possibility of overtightening

When asked about the sizing of future cuts, Streible said, “If you cut too dramatic, or if it’s seen as a one-and-done (measure), that’s what gold futures don’t like in the U.S. … Gold bulls want less aggressive action by the fed so the journey you’re on takes longer to reach. In a perfect world, the fed cuts 25, then 25, then 25, then 25 until they reach the neutral rate and that’s how gold futures will continue to go up.”

Traders are pricing in a 100% chance of a rate cut at the upcoming FOMC meeting on Sept. 18. About 85% of traders believe the cut will be 25 basis points, while the remaining 15% are speculating to see a 50-basis-point cut, according to CME’s FedWatch.

Shrinking rates and the effect

While lower interest rates are often seen as a sign of a stronger economy, Streible said the beginning of a cutting cycle often comes with additional stress on an economy.

“We have the highest-yielding accounts in two decades,” he said. “People who have been getting 5% in their money market accounts — that’s about to start ratcheting down and people rely on that for monthly income. When you take that away, they tighten their belt and the economy tightens as well.

“Then businesses say, ‘Hey the fed is cutting rates, something is wrong with the economy, and they will tighten on loans.”

What lies ahead for gold

Streible said looking back to the inflationary woes of the 1980s can bring clarity to the current interest rate climate as it pertains to precious metals.

“If you go back to 1980 and look at interest rate cuts after a hiking cycle, gold futures have rallied 6% in 30 days after that first cut.”

Precious metals investors should be comfortable holding the current position based on what Streible said, but could use caution to watch for the Federal Reserve to make sweeping cuts that could harm the market.