【Hotspot Tracking】Interest Rate Cuts Are Inevitable; Gold Is the Top Investment Choice

2025 has been a year where gold’s yield leads global assets. Since the start of the year, its maximum increase has exceeded 66%. Over the same period, the Dow Jones Industrial Average saw a maximum gain of approximately 28%, the Nasdaq Composite Index around 54%, and the S&P 500 Index about 40% — all lagging behind gold. The probability of the Federal Reserve (Fed) implementing consecutive interest rate cuts next is high, and the magnitude of the cuts may exceed market expectations. It might even end its balance sheet reduction within the year. Interest rate cuts and balance sheet reduction will become the driving forces for a new round of gold price increases, and there is a high probability that gold will test the $4,500 level.

Interest Rate Cuts Are on the Way

As various economic indicators flash red, the Fed has had to abandon its previous cautious stance and continuously issue dovish remarks regarding interest rate cuts. The newly released Beige Book shows that U.S. economic momentum is weakening. The August report indicated that 4 out of 12 districts achieved moderate growth while the remaining 8 saw little change. However, the latest report states that overall economic activity has changed minimally — only 3 out of 12 districts recorded slight to moderate growth, 5 remained flat, and 4 experienced a small contraction. This confirms Fed Chair Jerome Powell’s statement on October 12 that "economic conditions have not improved since the 25-basis-point rate cut on September 17."

Meanwhile, the U.S. government shutdown and new tariff policies will further exacerbate the country’s economic woes. Data shows that each week the shutdown continues will reduce U.S. GDP by 0.1 to 0.2 percentage points. If the U.S. government shutdown lasts until mid-to-late October, the unemployment rate may rise sharply from 4.3% to 4.8%. A one-month government shutdown could lead to a $30 billion loss in consumer spending across the U.S. These factors may force the Fed to accelerate its "preventive rate cuts" and take more aggressive preventive measures to avoid an economic recession, which could result in consecutive interest rate cuts. The probability of a rate cut in October exceeds 90%, and a direct 50-basis-point cut may directly ignite enthusiasm in the gold market.

Balance Sheet Reduction May End Ahead of Schedule

Peng Cheng, a market strategist at Zhisheng Research, believes that the Fed’s balance sheet reduction may end ahead of schedule, and its impact on improving market liquidity is more significant than interest rate cuts. On October 14, Fed Chair Jerome Powell spoke about balance sheet reduction, stating that the Fed now believes it is close to the target level and may reach this threshold "in the coming months." Major investment banks predict that the Fed may end its balance sheet reduction by the end of this year, earlier than the previously expected first quarter of next year. This may be a necessary move for the Fed, as more signals in recent weeks indicate that liquidity in the overnight money market is tightening. Since the beginning of September, the repo market rate — at which banks and asset management companies lend to each other — has risen and has remained high since then. As of October 8, the total reserves of banks in the Fed system have dropped to $3.03 trillion, which is very close to the safe threshold of $2.7 trillion. To avoid systemic risks, it is essential for the Fed to end balance sheet reduction ahead of schedule.

Ending balance sheet reduction means the Fed will shift from "draining liquidity" to "injecting liquidity" into the financial market, providing a more stable liquidity foundation for the market. This usually reduces the opportunity cost of holding non-interest-bearing assets like gold, thereby boosting gold prices. Both interest rate cuts and the end of balance sheet reduction indicate that market liquidity will improve significantly in the future, but they also signal that the U.S. economy may be facing serious problems. These are all driving forces for funds to flow into gold. 

[Important Disclaimer:The above content and views are provided by Zhisheng, a third-party cooperative platform, for reference only and do not constitute any investment advice. Investors who trade based on this information shall bear their own risks.]

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