Lower policy rates are set to send real rates, carry and opportunity costs sharply lower, which should bring speculative and ETF investors back in. This will very much work in tandem with physical markets and relative positioning, which is skewed to the short end, to bring gold above $2,300/ oz later in the year.

US monetary policy authorities have to adhere to the Federal Reserve Act, which mandates that they target both stable inflation and maximum employment at the same time. This suggests that the Fed tends to be tuned to protecting groups in the US against the ravages of inflation and unemployment. The central bank is currently pursuing aggressive restrictive policy because high inflation is hitting households on the lower end of income distribution hard. When the US central bank judges that economic weakness, which no doubt will include elevated unemployment, is hurting the least well off, it is likely to cut policy rates to mitigate the adverse impact on their wellbeing.

The strong likelihood that the Fed will start cutting before inflation reaches the desired level suggests that long-term investors, who have an interest in wealth preservation, may boost portfolio weightings of gold.

Cutting rates significantly before the 2% inflation target is reached may well convince many in the gold market to hedge their long-term purchasing power. They may question the credibility of the Fed’s commitment to the current inflation target. The potential of a US election outcome, which elects politicians who want to cut taxes and grow spending at the same time, may also be a reason investors and central banks continue to buy physical gold.

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