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Gold To Shine As Impending Fed Rate Cut Is Just The Start - Saxo Bank

Kitco News

(Kitco News) - Financial markets are on the cusp of seeing the Federal Reserve cut interest rates for the first time since 2008, but one international bank said that looser global monetary policy won’t be enough and gold is best positioned to benefit.

Analysts at Saxo Bank said in their third quarter outlook published in early July that the world continues to move towards a global financial panic that will push central banks to significantly loosen monetary policies. However, the analysts noted that this still won’t be enough to stop the impending economic slowdown.

As the year progresses, Saxo Bank market analysts expect that governments will jump in with new fiscal policies to promote economic growth. The bank sees Europe leading the way in fiscal stimulus measures because “there is little room left for monetary policy,” as interest rates are already in negative territory.

“By the summer of 2020 -- one year from now -- we will have seen the end of any belief in monetary policy moving the needle, and will be witnessing extravagant spending driving inflation to levels beyond anyone’s expectations,” said Steen Jakobsen, chief economist and chief investment officer at the Danish Bank.

Wednesday, the Federal Reserve is expected to kick off a new global easing among the major central banks; markets project at least a 25 basis point cut this afternoon. At the same time, the CME FedWatch Tool shows that markets still see a more than 20% chance of a 50 basis-point move.

However, the analyst at Saxo Bank said that investors need to look beyond the current monetary policy meeting and look at the larger trend. Ultimately, interest rates are headed much lower, they said.

“If we see material signs of weakening in the third quarter, the Fed will chop to the effective zero bound at a breath-taking clip and could even restart quantitative easing before year-end,” the analysts said.

In this environment the bank is expecting to see material weakness in the U.S. dollar and the biggest winner is expected to be gold.

“Gold [is] best positioned to benefit from a renewed race to the bottom in central bank rates and bond yields, while the risk of a renewed currency war could weaken the U.S. dollar,” said Ole Hansen, head of commodity strategy.

Hansen added that he expects gold prices will rally to his target of $1,483 an ounce, which represents the 50% retracement level from the 2011 high to the 2015 low. Hansen’s latest price target presents a gain of nearly 3% from current levels. December gold futures last traded at $1,440.50 an ounce, relatively flat on the day.

“Driving the initial move higher are expectations that global central banks will cut rates to spur growth, which has proven increasingly difficult to achieve with trade wars disrupting global supply chains,” said Hansen.

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