Gold prices surged Tuesday after the Federal Reserve made its first emergency rate cut since the 2008 global financial crisis amid concerns the coronavirus outbreak would curtail U.S. economic growth.
The precious metal rose as much as 3.7 percent to $1,650.50 an ounce, and was within striking distance of its seven-year closing high of $1676.60.
“Historically, emergency cuts have been very bullish for gold,” Ryan Giannotto, director of research at GraniteShares, a New York-based independent exchange-traded fund company, told FOX Business. He pointed to gold gaining 17.5 percent in the 12 months following the 2008 emergency rate cut as evidence.
Giannotto says the Fed’s “drastic action” increases the “hurricane cone of uncertainty” and signals further central bank accommodation “could be in the pipeline.”
Fed Chairman Jerome Powell made similar indications at a Tuesday news conference, saying the central bank will do its part to “keep the U.S. economy strong” as the coronavirus roils corporate profits and supply chains. Fed fund futures traded at the CME Group, meanwhile, indicate a 51 percent chance the central bank will cut its key rate by another 25 basis points at its April meeting.
As for how high gold goes, Giannotto pointed to the yield curve’s 2018 inversion for a clue.
“Going back to 1971, gold has rallied 53 percent over the following 24 months” from a yield-curve inversion, he said. Since the 2-10-year spread first inverted on Aug. 23, 2018, gold prices have climbed by 7.6 percent, suggesting the price would reach more than $2,300 if it matched historical patterns.
Meanwhile, Peter Schiff, CEO of Westport, Connecticut-based Euro Pacific Capital, told FOX Business that the rate cut has “nothing to do with the coronavirus” and is all about “sustaining the bubble.”
He thinks gold will “beat the U.S. stock market by a wide margin over this decade.” So far this year, gold futures for April delivery have gained 7.9 percent, outperforming the S&P 500’s 5.3 percent drop.
Schiff believes gold is poised to top its 2011 record high of $1,911.60 an ounce as the Federal Reserve tries to “prop up” stocks in order to avoid the “reverse wealth effect of a weakening stock market” that pushes the U.S. economy into a recession.
While Schiff says it’s a “moving target,” he believes gold may reach $5,000 or even $10,000 an ounce.
“Gold's going ballistic because the Fed is going to zero,” Schiff said.