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Gold price gains against the Swiss franc highlight its potential when the Fed starts cutting rates

The Federal Reserve’s signal that it still sees the potential for three rate cuts this year, even as inflation remains above its 2% target, has helped propel gold prices to new record highs.

However, some analysts have said that the gold’s true light will shine when the central bank actually embarks on its easing cycle. Some analysts have said that gold’s reaction to the Swiss National Bank’s move to ease is an indication of what to expect.

Thursday, Switzerland’s Swiss National Bank surprised markets with a 25 basis point cut, bringing interest rates to 1.5%. The SNB is the first major central bank to cut interest rates.

The central bank said it eased its monetary policy as inflation is expected to remain below its 2% target this year.

“For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability. According to the new forecast, inflation is also likely to remain in this range over the next few years,” the bank said in its monetary policy statement.

The central bank also reduced its annual inflation forecasts. It now sees average inflation reaching 1.4% this year, down from its December estimate of 1.9%. Inflation is expected to slow even further next year, rising 1.2%, down from the previous 1.6% estimate. In its first look at 2026, the SNB projects average inflation at 1.1%.

Economists from Capital Economics said that they expect the SNB will continue to lower interest rates this year as inflation pressures remain weak.

“As it happens, we think inflation is actually likely to be lower than the SNB is forecasting, and so we expect it to cut rates again in September and December, taking the policy rate to 1.0%, where we expect it to stay throughout 2024,” the economists said in a note.

The SNB’s interest rate cut has had a solid impact on the gold market. Gold prices have pushed significantly higher against the Swiss franc Thursday.

Holding near session highs, spot gold last traded at CHF55,352.36, up +2.06%.

Although some analysts have described the SNB’s move as a surprise, it is not unexpected for others. March Chandler, managing director at Bannockburn Global Forex, said that he has been warning investors that cuts were coming.

“Rate cuts from the Fed are coming, so the SNB has to beat them to it too because they need to give their currency some cushion against weakness in the U.S. dollar,” he said.

While it’s not exactly an “apples to apples” comparison, some analysts have said that gold price action against the dollar when the Fed cuts could be similar to what has been seen against the Swiss franc.

Chandler said that the biggest difference is that he expects gold’s rally to lead what appears to be a likely cut in June. He added that he expects bond yields and the U.S. dollar to weaken ahead of the Fed’s June meeting, which will support higher gold prices.

Phillip Streible, chief market strategist at Blue Line Futures, said that gold’s move against the Swiss franc highlights broader market conditions. He pointed out that the weakness in the Swissy helped propel the broader U.S. dollar index to a one-month high, which has hurt gold.

Despite hitting all-time highs overnight above $2,220 an ounce, gold is ending the day in the red against the greenback. Spot gold last traded at $2,183.14 an ounce, down 0.13 on the day.

However, Streible said that gold still has plenty of room to run when it’s the Fed’s turn to cut rates.

“Research we have looked at says since the 1990s, gold has rallied 6% in the first 30 days after the Federal Reserve’s first rate cut in an easing cycle,” he said.

Source: Neils Christensen Kitco