Fed rate cut expectations shift: What's next for precious metals?

The recently released US labor market data is strong, and the market believes that the Fed will be cautious about interest rate cuts given the stagnation of US inflation, thus strengthening the dollar.

“This week, due to the easing of geopolitical conflicts, market risk aversion has receded. Coupled with the persistence of US inflation, the Fed will be cautious in deciding the next interest rate cut, the US dollar index remains high, and gold prices have fallen.” Shan Shan, a precious metals analyst at Huishang Futures, said.

According to Pu Zulin, a precious metals analyst at Zhengxin Futures, on the one hand, the probability of escalation of the Russia-Ukraine and Middle East conflicts has weakened, and a ceasefire agreement has been reached in Lebanon and Israel, leading to a decline in risk aversion; on the other hand, the "Trump re-inflation trade" sentiment has subsided with the appointment of the US Treasury Secretary and Trade Representative, causing US Treasury yields, the US dollar index, and precious metals to fall simultaneously.

Liu Peiyang, head of the industrial products group at Zhongyuan Futures Research Institute, also believes that the weakening of risk appetite, coupled with market expectations that the Fed's interest rate cuts in 2025 will be narrowed, has led to the recent sluggish performance of the precious metals sector. "Recently released US economic data shows that the labor market remains resilient, the year-on-year growth rate of core PCE has rebounded, and the work of curbing inflation has stalled, which to some extent suppresses expectations of interest rate cuts, putting overall pressure on precious metals." he said.

In addition, the Futures Daily reporter noted that against the backdrop of weak precious metals, silver futures performed even more weakly. Yesterday, the main contract of Shanghai silver futures fell by 1.28%.

In this regard, Pu Zulin believes that the weaker performance of silver is mainly due to the combined drag of industrial demand, safe-haven demand, and financial attributes.

In Shan Shan's view, although silver prices have risen in tandem with gold, their commodity attributes are more obvious than gold. Data shows that US manufacturing remains weak, coupled with the high elasticity and volatility of silver prices, the decline in silver prices is more significant.

In terms of economic data, the year-on-year growth rate of the US PCE price index in October rose from 2.1% in September to 2.3%, and the year-on-year growth rate of the core PCE price index rose slightly from 2.7% to 2.8%, still some distance from the target of 2%. Liu Peiyang believes that the additional tariffs that Trump may introduce after taking office will increase the pressure for inflation to rebound, adding uncertainty to the Fed's future monetary policy. The Fed will assess the pace of each interest rate cut based on the latest economic data. A further 25 basis point rate cut may occur in December this year, while only one rate cut may occur in the first half of next year, and gold prices are likely to remain volatile.

“US inflation remains sticky, coupled with the strong resilience of the US economy, which to some extent supports the Fed's more cautious approach to future interest rate cuts, narrowing the interest rate cut and increasing expectations of no interest rate cuts. However, the European Central Bank's expectations for interest rate cuts are stronger, and the difference in the pace of monetary policy between the US and European central banks has boosted the dollar to a certain extent. Therefore, although interest rate cuts and geopolitical situations support precious metal prices, there is some pressure on continued upward movement, and the price center is expected to move upward slowly.” Shan Shan said.

In Pu Zulin's view, the policies of Trump's early days in office will revolve around imposing tariffs on foreign countries, cutting taxes domestically, cutting budget spending, and driving out illegal immigrants, which may lead to a resurgence of US inflation. Cutting budget spending and driving out immigrants will also lead to a sharp decline in service inflation. It is expected that US inflation will generally remain in the range of 2.8% to 3.2% in 2025, the Fed's interest rate cut cycle will continue, but the room for interest rate cuts will be relatively small. It is expected that the benchmark interest rate will fall to the target range of 3.8% to 4.8%, with 2 to 3 interest rate cuts, providing long-term support for precious metals.

Overseas institutions believe that Trump's policies after taking office will increase uncertainty in the global financial market, and gold demand will therefore increase. Roukaya Ibrahim, a strategist at BCA, said that the extreme pressure strategy used by the new US administration will increase the interest of emerging market central banks in replenishing gold reserves, and it is expected that the positive effect of central bank gold purchases on gold will continue.

“On the one hand, Trump's policies of increasing tariffs, domestic tax cuts, and expelling illegal immigrants may lead to high inflation, highlighting the importance of gold as a safe-haven asset; on the other hand, Trump's proposal to end the "Russia-Ukraine conflict" will reduce the market's safe-haven demand for gold. Considering that the current gold price is at a historical high, the gold price may fluctuate after Trump takes office, and overall, the probability of gold price rising is higher.” Liu Peiyang said.

According to Pu Zulin, Trump's campaign slogan of "Making America Great Again" suggests that the United States will implement a global strategic contraction policy in the next few years, and the international trade system established under the leadership of the United States after World War II faces severe challenges. Important international trade distribution centers, ports, and transportation centers face huge security risks. Coupled with the Sino-US trade friction, various trading countries choose camps, and the risk of trade conflicts has significantly increased. Small-country central banks will gradually reduce the proportion of US dollar foreign exchange reserves and increase their holdings of precious metals or other currencies (RMB, digital currency), which is obviously good news for precious metals.