Gold Price Forecast: Understanding Market Bets on the 50-bp Rate Cut

Gold Prices Dip as Traders Await US Fed Rate Decision

Gold prices edged lower on Tuesday, following a record high on Monday, as traders turned their attention to the Federal Reserve’s interest rate decision. The market has shifted focus to the Fed’s two-day policy meeting, which concludes on Wednesday, with traders anticipating a potentially aggressive rate cut.

Market Expectations for a Fed Rate Cut

There is a growing consensus that the Fed could announce a 50 basis point (bp) cut, with market participants now assigning a 67% probability for this larger-than-expected reduction, compared to only 34% last week. The prospect of this aggressive easing was fueled by media reports over the weekend. If the Fed delivers the anticipated 50-bp cut, gold prices could surge past $2,600 per ounce, with projections ranging between $2,649.43 and $2,660.90.

However, if the Fed opts for a more modest 25-bp cut, some market analysts warn of potential disappointment among bullish traders, which could trigger profit-taking. In such a scenario, gold prices may retreat towards the former high of $2,531.77. Lower interest rates generally favor gold by reducing the opportunity cost of holding non-yielding bullion.

Gold’s Recent Rally Fueled by Fed Expectations and a Weaker Dollar

Gold soared to a new all-time high of $2,589.72 per ounce on Monday, driven by a weakening dollar and the mounting expectation of a significant Fed rate cut. Goldman Sachs remains bullish on gold, reiterating its price target of $2,700 per ounce by early 2025.

The investment bank noted that central bank demand, coupled with the Fed’s dovish stance, continues to support gold prices. Goldman also highlighted that ETF demand for gold is rising, as Western capital flows into gold-backed exchange-traded funds (ETFs). These ETFs, fully backed by physical gold, reduce the available physical supply in the market, further bolstering prices.

Broader Economic Indicators to Watch

While the Federal Reserve’s decision takes center stage, traders will also be closely monitoring U.S. economic data due this week. Retail sales figures for August are expected to show a 0.2% decline, while additional data on housing starts, building permits, and existing home sales could provide further clues about the health of the U.S. economy. The Bank of England and Bank of Japan are also holding policy meetings this week, adding to the potential market volatility.

Gold Prices Forecast

If the Fed delivers a 50-bp rate cut and signals further easing, the outlook for gold remains bullish, with potential gains extending above $2,600 per ounce. Conversely, a smaller 25-bp cut could see gold temporarily dip on profit-taking, although long-term support remains strong due to central bank demand and continued ETF inflows. Traders should brace for potential volatility around the Fed announcement and upcoming U.S. economic data.