Fed's aggressive rate cut sparks record gold rally in Pakistan

September 23, 2024 (MLN): Pakistan’s bullion market delivered substantial returns to investors last week, with prices surging to new highs in line with international rates.

The price of 24-karat gold, the key benchmark in the domestic market, reached a new record of Rs272,500 per tola, marking an increase of Rs6,200, or 2.33%, compared to the previous week.

With this, the yellow metal’s gain in the ongoing calendar year has spiked to 23.86%, while it stands at 12.74% for the fiscal year. This outpaces the KSE-100 index's fiscal year return of 4.63% but falls short of the record-breaking 31.42% return for the current calendar year.

In addition to the global uplift driving gold prices higher in the country, the sudden uptick in demand following the central bank's announcement to change currency notes next year to enhance security features is another key factor supporting this trend.

Hoarders looking to convert their informal currency into gold are creating a rush in the bullion market, helping dealers book further profits.

This became evident as the underpricing in the local market—initiated by the gold dealers due to diminishing purchasing power among people—vanished in September, reflecting some sort of confidence about demand.

The key driver of prices this week is the aggressive 50 basis points cut by the U.S. Federal Reserve, adding to the appeal for gold, which pays no interest.

That marked the first rate cut since March 2020 and was larger than expected.

Subsequently, international spot gold closed at a fresh record level of $2,622.24, up by 1.69% or $43.52 per ounce compared to the prior’s week closing rate.

The combination of geopolitical conflicts, monetary easing across economies, a weakening Dollar and robust buying by central banks has created a record-shattering rally for the yellow metal.

For reference, the U.S. Dollar Index (DXY), which tracks the value of the greenback against six other top currencies dropped by 0.37% over the week, marking its third consecutive weekly drop or the tenth one since July 2024.

A weaker dollar makes gold more affordable for holders of other currencies, exerting a positive impact on gold prices.

Likewise, falling yields also benefit the metal as they reduce the opportunity cost of holding the safe-haven asset.

Looking ahead, policymakers see the federal funds rate falling by another 50bps by the end of this year, another 100bps in 2025, and by a final 50bps in 2026 to end in a 2.75%-3% range, paving the way for a brighter outlook for gold.

"The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance," it said in a statement.

Impact of Local Currency

It is worth mentioning that Pakistan’s currency also has a major role in driving gold prices in the country.

The Pakistani rupee (PKR) has remained largely stable against the strong U.S. dollar for a prolonged period, which generally benefits local gold. 

This firmness allows changes in international gold prices to have a more direct impact, as the local market remains shielded from currency fluctuations.

On a weekly basis, the home currency registered a gain of 33 paisa against the mighty Dollar.

Since gold is denominated in U.S. Dollar terms, when PKR appreciates against the greenback, the value of PKR-denominated gold falls.

However, the global uplift was significant enough to outweigh the slight impact of the strengthening of the home unit, leading to record gains on a net basis.

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