Gold (XAUUSD) has witnessed an incredible year, with the precious metal rising by 39% year-to-date, outpacing its annual returns during the COVID-19 pandemic and the Great Recession. On Monday, it notched another all-time high of $3,724.90 per troy ounce. However, the underlying factors powering the precious metal higher could be troubling for the economy.
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Gold tends to thrive during times of economic uncertainty. That’s been the case this year, with tariffs, geopolitical tensions, and a shaky labor market contributing to the rally. In addition, inflation is still well above the Fed’s long-term target of 2.0%, with August’s Consumer Price Index (CPI) showing 2.9% annual growth.
“The risk of the s-word—stagflation—has increased,” said State Street head of gold strategy Aakash Doshi. “That is a perfect environment for gold.” Stagflation occurs when the economy experiences elevated inflation, high unemployment, and slow growth at the same time.
Lower Rates Could Boost the Case for Gold
Furthermore, gold becomes a better investment during times of lower interest rates. That’s because bullion doesn’t pay out interest, lowering the opportunity cost of holding it compared to government bonds when rates are low.
The Fed will meet this week at the September 16-17 Federal Open Market Committee (FOMC) meeting and is widely expected to lower rates by 25 bps. However, Standard Chartered believes that a weakening labor market supports a 50 bps cut. If this happens, the rationale for holding gold could climb higher.
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