Those familiar with gold as an investable asset are aware of its potential to respond favorably to reductions in interest rates. But rate cuts in the face of higher inflation? That’s an even surer bet, emphasized Bank of America recently…a bet that now has been formally placed by the Federal Reserve.
Perhaps the most oft-cited reason for gold’s tendency to strengthen in the face of declining interest rates is that as rates drop, the “opportunity cost” of holding nonyielding assets like precious metals drop with them.
There are other reasons why gold typically rises as rates fall. One reason is that the onset of a tumbling-rate cycle often means the economy is facing a downturn, a circumstance which can enhance gold’s safe-haven appeal. Plus, lower rates may accelerate currency debasement and enhance inflation risks, which also tend to improve gold’s desirability as a store of value.
But however stimulating for gold that declining rates might be, anyway, it seems they have the potential to be even more invigorating when they’re dropping while inflation is still above the central bank’s 2% target. And that historical tendency is especially relevant right now, given the Federal Reserve’s decision earlier this month to resume rate cuts comes amid what not only is a still-ongoing run of elevated inflation now in its fifth year…but comes, as well, at a time when the most recent gauges show price pressures reaccelerating.
It’s a scenario, say analysts at Bank of America, that bodes especially well for gold in the months to come.
Gold Is a Sure Bet When Rates Are Cut While CPI Remains Above 2%, Say Strategists
“The Fed usually takes a balanced approach to its dual policy goal of full employment and price stability. Hence, from a gold perspective, prioritization of the labor market over inflation matters,” explained Michael Widmer and the other metals strategists at Bank of America recently. “Since 2001, gold has pushed higher every time the Fed has cut rates when U.S. CPI (consumer price index) is above 2%.”
“In fact,” Widmer and team clarified, “excluding the period of the global financial crisis, gold has delivered an annual return of approximately 13% during periods of ‘inflationary easing.’”
As for where Bank of America sees gold heading through the near term, the next major price target eyed by strategists is $4,000, a level they expect will be reached during the second quarter of 2026.
It’s important to note, however, that analysts anticipate gold forging higher not only on the strength of a structural return to explicitly accommodative monetary policy, but also on the back of the geopolitical and fiscal uncertainty which has proved to be so supportive of the metal over the last several years. And the reason that’s important is because it underscores – and should underscore for investors – just how comprehensive and multidimensional the set of drivers powering gold higher continues to be.
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