Gold or stocks! : Who might benefit more from interest rate cuts?

• The Federal Reserve made its first interest rate cut in four years, by half a percentage point.
• The relationship between stocks and gold is inversely related to the interest rates of the dollar.
• This article discusses which might benefit more from a rate cut, gold or stocks?

Introduction:

After four full years, the US Federal Reserve made its first interest rate cut from the highest levels it reached at 5.5%; The Federal Reserve reduced interest rates by half a full point, after previous expectations of reducing them by only a quarter of a percentage point, which the markets considered a great start to easing the tight monetary policy that the Federal Reserve has been pursuing since inflation began to rise at the end of 2021 and reached levels of 9.1% in July 2022.

Reduce interest rates by half a point: Necessary and justified!

Although the markets and some analysts found this measure to be significant by the Federal Reserve, others found it to be a necessary and justified reduction.

First. Reduce interest rates! Necessary:

Some analysts interpreted the half-percentage-point cut as a nnecessary to speed up the process of saving the US economy from heading towards recession, or to push towards implementing the US Federal Reserve's theory of a soft landing for the economy.

This cut coincided with a general decline in labor market indicators, specifically with a decline in the general pattern of employment, even if it was better than expected, in addition to the stability of unemployment rates at 4.2%, which is the highest since the November 2021 reading.

Second. Reduce interest! Justified:

Some analysts also found it justified in terms of the continuous decline in inflation rates, which fell for the fifth time to reach 2.5% on an annual basis, thus approaching the Federal Reserve's target interest rate of 2%.

In addition to several previous economic indicators that led to reassurance from the Federal Reserve, the most prominent of which were the retail sales index, the personal consumption expenditure index, and the producer price index, which all feel better than expected.

Gold or stocks ? Which can benefit the most from the interest rate cut?

The beginning of the reduction of interest rates and the start of easing monetary policy on the US side was something that the stock and commodity markets, especially gold, were waiting for. These markets have an inverse relationship with interest rates, meaning that the attractiveness of the returns or profits they offer improves compared to the decline in the interest rates offered by the dollar.

The impact of the reduction was positive for both markets, especially in the early days of announcing the Federal Reserve’s decision to reduce interest rates to this extent, as gold reached levels of $2,600, its highest levels in history, while stock indices showed some improvement.

Analyzing both gold and stocks as beneficiaries of reducing interest rates suggests that gold may soon outperform stocks for two main reasons: it typically reacts more quickly to rate cuts, attracting safe-haven investors, and the current geopolitical tensions and economic volatility enhance its appeal as a reliable store of value, unlike stocks, which are more influenced by market sentiment.

Gold may benefit more from reducing interest rates! Why?

The interest rate cut comes late in the year, compared to hopes that the reduction would start in early 2024.

And during that waiting period, stock markets were witnessing various fluctuations, the most prominent of which was what happened in August, when stock markets suffered a setback due to the decline in US labor market conditions, which represents a risk factor that gold may exploit to its advantage until stock markets are reassured of the improvement in US labor conditions, which requires the time factor during which US labor indicators will be issued.

Also the stock markets will face an important test represented by the quarterly corporate results that will be issued in October of this year, which will give a greater glimpse into the extent of its health, especially among major companies, led by a company like Nvidia.

Until those indicators and data are issued that guarantee the stock market a significant return of confidence, gold may exploit this as an opportunity to increase its attractiveness to market traders.

As for the surrounding circumstances, gold is still living in a period of geopolitical turmoil, most notably what is happening in the Middle East, Russia and Ukraine, in addition to the biggest political test represented by the upcoming US elections in early November 2024. By combining the previous economic and political conditions, market traders may find gold a good alternative, especially in light of the decline in important returns such as the returns on US bonds, which declined shortly after the Federal Reserve cut interest rates.