The Resilient Rally in Gold

Gold’s explosive performance through the first four months of 2024 was, in large part, widely attributed to an expectation that the Federal Reserve would soon be lowering interest rates. After all, a drop in rates means non-yielding gold has less competition from fixed income securities, and lower rates typically push the U.S. dollar into decline. All that was needed for the Fed to move was continued evidence that inflation was moderating. But instead of seeing a slowdown, inflation indicators ticked higher, putting Fed rate cuts off the table for the near future.

In theory, gold should have plunged when Federal Reserve Chair Jerome Powell conceded this point on May 1, saying, “We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward two percent. So far this year, the data have not given us that greater confidence.” The Fed chair added, “We are prepared to maintain the current target rate for the federal funds rate for as long as appropriate.”

Yet gold has been able to hold onto most of its gains, even as it has become clear that interest rates will remain higher for longer. As of the end of April, gold was up 10 percent year-to-date, besting all major investment categories.