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• Gold and spot ETFs like GLD and IAU have surged to a record high this year.
• The Federal Reserve has hinted that it will cut interest rates.
• There are signs that gold and associated ETFs could reverse.

Gold price was hovering near its all-time high of $2,587 on Wednesday morning as investors waited for the Federal Reserve interest rate decision. It has been one of the best-performing metals as it jumped by over 40% from its lowest point in December last year.

Gold has jumped by 25% this year while metals like iron ore, platinum, and palladium have struggled. Platinum is barely moved this year while iron ore has dropped by over 20% from its highest point in 2023.

The closely-watched SPDR Gold Trust (GLD), the biggest gold ETF, has also soared to a high of $240. Other gold ETFs like the iShares Gold Trust (IAU) and the SPDR Gold MiniShares Trust (GLDM) have also surged this year.

Federal Reserve decision
 

The main catalyst for gold prices is the rising optimism that the Federal Reserve will start to cut interest rates when it completes its two-day meeting on Wednesday.

Officials have already telegraphed that the cut is coming. For example, the last FOMC minutes showed that some committee members supported cutting interest rates during that meeting. 

This view has been supported by the recent economic data from the US. A report by the Commerce Department showed that retail sales remained under pressure in August. 

Additional data showed that the country’s consumer inflation continued falling in August, with the headline figure coming in at 2.5%, its lowest point since 2021. 

Also, the labor market has softened, with the unemployment rate rising to 4.2% in August, much higher than last year’s low of 3.5%. 

The Federal Reserve cuts interest rates when the economy is not doing well to stimulate demand. What is unclear, however, is the size of the upcoming interest rate cut. Some analysts expect the bank to cut rates by 0.50% while others see the rate cut coming in at 0.25%.

A 0.50% cut will be a sign that Fed officials believe that the economy is in a worse shape or that it is heading towards a hard landing.

The market is predicting a rate cut
 

The market has also priced in a rate cut. American stock indices like the Dow Jones, Nasdaq 100, and S&P 500 are nearing their all-time highs while the US dollar index (DXY) has dropped to $101. 10-year and 30-year Treasury yields have pulled back to 3.67% and 3.956%, respectively 

Gold, unlike other metals, is more sensitive to the actions of the Federal Reserve. In most cases, the metal rises when the bank is cutting rates and vice versa. The recent gains are likely because investors anticipate the Fed to start cutting rates. 

Gold’s sensitivity to interest rates is because it is often seen as an alternative to the US dollar and other fiat currencies. This explains why many central banks have accumulated tons of gold as their reserves.

The US holds over 8,133 tons of gold in its reserves while Germany, Italy, France, Russia, and China have over 1,947 tons. Some of these countries have continued to accumulate gold this year. 

Analysts believe that China will want to own more gold in the future as it aims to become the biggest economy in the world. Recently, however, its central bank has not bought more gold because of the elevated prices. 

Impact on gold miners
 

A likely catalyst for the soaring gold prices is that miners will be among the top beneficiaries. The closely watched VanEck Gold Miners ETF, which has over $15 billion in assets, has jumped by over 35% in the last 12 months and by 325 this year. 

Other smaller gold mining ETFs like the VanEck Junior Gold Miners ETF (GDXJ) have risen by almost 30% while the Direxion Daily Gold Miners Index Bull 2x Shares (NUGT) has soared by 45.45% this year.

One of the best-performing gold mining companies is Wheaton Precious Metal, which has soared by 16% in the last 3 months and 41% in the past 12 months. Wheaton, unlike other mining companies, is a streaming company that makes money from the rights it holds in mines.

The other top gold mining companies this year are Newmont, Agnico Eagle Mines, Barrick Gold, and Franco-Nevada. 

Gold price analysis
 

Gold price chart

The daily chart shows that gold has been in a strong bull run in the past few months. This rally happened in anticipation of Fed rate cuts. Gold has remained above the 50-day and 100-day Exponential Moving Averages (EMA).

However, gold has also formed a rising wedge chart pattern. In most periods, this is one of the most bearish patterns, especially when it is nearing a confluence zone. The Relative Strength Index (RSI) has formed a symmetrical triangle pattern, which is nearing the confluence level.

Therefore, gold could have a bearish breakout in the coming days since the Fed rate cut has already been priced in by market participants. If this happens, gold ETFs like GLD and IAU and miner funds like GDX and NUGT will also do the same.

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