Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Financial markets are in stasis this week as they wait in bated anticipation for the outcome of US Federal Reserve’s interest rate decision due on Wednesday 18th September (19th Sept at 4am AEST). While never a foregone conclusion, markets are 100% pricing in the first rate cut since March 2020 but the size is still a mystery. Despite the anticipation, one area trading heavily in anticipation is the precious metals market with gold making setting fresh all-time highs. ABSI this week is covering this momentous macro event and the price action in precious metals. 

This week is all about the Fed. All eyes are on them but not to see if a cut will come but to ascertain what the quantum will be: 25 bps or 50 bps. Traders see this as a close call but the differences in outcomes will be momentous to how financial assets trade. A 25 bps cut conveys all is on track for a “soft landing” but a 50 bps cut is tantamount to pulling the fire alarm and telling everyone to evacuate the building. Fed Chair Powell would be aware of how markets would react to 50 bps so the odds on this option should be longer than the current pricing of about 70% versus 30% odds for 25 bps. 

Source: Zerohedge

The Fed’s decision is a tough one given the conflicting macro data they have to contend with. While GDP is still a healthy 3% and inflation at 2.5% is something to continue to keep an eye on. However, unemployment is tracking higher and business confidence is low which are reasons to loosen monetary policy. Further data out this week include US retail sales, industrial production, housing starts and permits, existing home sales, and initial jobless claims.  

Given the momentous macro data due this week, most financial markets are in a holding pattern until the outcome is known. However, one area of the market continuing to trade strongly is gold and other precious metals. Yesterday, gold extended its all-time highs to US$2,589.59/oz in the spot market with gold futures trading above the US$2,600/oz threshold. Silver also joined the party trading above US$30/oz and is currently around US$30.74/oz. At the start of Sept silver was trading under US$28/oz so this recent price action is a material movement in price. The surge in silver has seen the gold-to-silver ratio retreat from almost 90x to 83.8x.

Source: Koyfin

The surge in gold in anticipation of the upcoming meeting is due to lower interest rates weakening the US dollar and lowering the cost of carry as a non-yielding asset. Moreover, the recent 2nd assassination attempt on Donald Trump is spurring on geopolitical uncertainty which highlights gold’s role as a safe haven asset. Many analysts are now setting multi-year future price targets at US$3,000/oz. 

In contrast, the surge in silver relates not only to the Fed actions but to its growing industrial use. Increasingly silver bulls are linking the metal to the AI-trade given its use in electronics and renewable energy technologies which are critical components in AI infrastructure. Moreover, silver supply has been in decline and the market is in a supply deficit which should contribute to price appreciation. Over the previous 12 months, the price growth of silver has been ~33.5%.

Finally, it is important to note that the Fed isn’t the only game in town this week with policy decisions due in Brazil, South Africa, the UK, and Japan but they all play side show to the main event. The Bank of Japan interest rate decision is expected to be a hold after causing drama over the past few months with its recent decision to end negative interest rates. Given that chaos, the BoJ won’t be looking to surprise the market again.

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