Goldilocks and the three rate paths

Bond market participants largely determine the appropriate level of interest rates, while the Federal Reserve (Fed) second-guesses those decisions to increase or decrease expectations. The result is that the correlation between the US Treasury two-year yield and the Federal Reserve Funds policy rate is very high. The market, of course, determines the two-year yield, while the FOMC sets the Fed funds rate.¹

For most of the year, it has been clear that the next move will be a cut, to close the 50–100 basis point (bps) gap between the two yield measures and align policy rates with market rates.

This assumption has underpinned our positive gold price view, as lower policy rates incentivize investors to buy more gold. This is a long-standing relationship based on gold having zero yield and the two-year having a non-zero yield.

About four years ago, central banks began buying gold in enough size that they determined the price path for gold and overrode the actions of investors who were selling gold.

However, investor purchases can still drive-up gold prices, as seen between June 2024 and September 2024. The Fed had hinted in June while gold was $2,400 an ounce, that a rate cut was likely in September and when the rate cut came, gold had hit nearly $2,800 an ounce.² We expected roughly the same to play out this year as gold came into June at $3,234 and recently reached $3,664.³

Policy decisions amid data complications

Much has been made of the unusually public policy dispute between President Trump and Chairman Powell. From our perspective, they are both victims of the same circumstance.

The President has implemented some of the most variable tariff policies in US history as he attempts to fine-tune the correct level of tariffs to support US government finances without causing broad-based economic harm to the US economy. The responsibility of the chairman is to oversee monetary policy, while trying to keep rates high enough to keep inflation from becoming ingrained and unemployment from rising, but also low enough to keep the economy humming along.

However, these decisions must be based on economic data, and the quality of the data has dropped substantially. Just days after the last FOMC meeting in July, the Bureau of Labor Statistics (BLS) revised employment data.⁴ In September, they revised the employment data even further.⁵

These were the most significant revisions in BLS history. Their data is based on surveys, with response rates lower now than before COVID.⁶ No wonder there are such meaningful revisions.

It is reasonable to expect that the President and Chairman both would have made different decisions given the revised data. The President has recently announced the moderation of even tariff rates that have been settled through new trade deals, stating that countries that have already successfully negotiated trade deals with his administration may receive even lower tariffs on some goods.

On September 17, the FOMC cut rates by 25 bps, seeing downside risks in the labor market, and the Summary of Economic Projections dot plot was revised to suggest three rate cuts by year's end.⁷ Both have moderated their policies that constrained economic growth since the BLS revised labor data, removing 911,000 jobs on September 9.⁴

Most major wall street banks currently have expectations of seven rate cuts in 2025-2026. Based on the two-year yield at 100 bps below Fed funds, the market justifies four of those rate cuts. Those four cuts are enough to push our gold target to $4,000 an ounce based on the possibility that gold investors raise their demand for gold based on falling interest rates, as they have in the past.

None of these issues change the above-average foreign central bank demand for gold, the other large demand segment in the market.

Silver linings in economic pessimism?

The peak gold-silver price ratio post-COVID was 104 on April 21, 2025. Prior significant peaks occurred on March 18, 2020 at a ratio of 124, and October 10, 2008 at a ratio of 85.⁸ The ability of these peaks to mark peak economic pessimism is notable.

April 25, 2025 was when China issued threats of countermeasures in trade talks, illustrating the two-sided risk of the aggressive US tariff policy and the potential for an economic slowdown.

March 18, 2020 was within 24 hours of then-President Trump announcing a $1 trillion COVID stimulus, revealing the magnitude of the pandemic.

October 10, 2008 was the day Lehman Brothers' bonds were auctioned off for eight pennies on the dollar during the global financial crisis, marking the extent of value deterioration in a firm that was highly regarded and borderline too big to fail.

What happened after these peaks in the economic pessimism? Silver rose 318.5% after October 2008.⁹ Silver rose 142.5% after March 2020.¹⁰ Silver rose 32.11% after April 2025.¹¹

More closely aligning policy rates with market rates and potentially new data gathering techniques have the promise of placing the economy on a surer footing and allowing companies to again borrow money to expand product lines, hire employees.

Past peaks in the gold-silver price ratio also marked the peak of economic pessimism as the market went on to gain clarity on the great unknowns of the time. Whether that was a clearing price for troubled assets in a financial crisis, or the level of government stimulus needed to support an economy in lockdown, or a moderation in the tariff levels during a reset of global trade relationships, the clarity gained allowed businesses to heal and again expand and hire workers.

While still early days, that's now a higher probability outcome with policy interest rates aligning with market rates.

Endnotes

¹ The Federal Open Market Committee (FOMC) is vital to the Federal Reserve's monetary policy. It sets the federal funds rate, influencing borrowing costs and economic activity. The FOMC meets regularly to implement policies aimed at achieving price stability and maximum employment.
² Bloomberg data: gold price $2,324 per ounce on 6/12/2024; $2787 on 10/30/2024.
³ Bloomberg data: gold price $3,234 per ounce on 5/30/2025; $3,664 on 9/17/2025.
⁴ "Labor department’s data upset may have sealed the deal for a Fed interest rate cut." Fortune, August 2025. https://fortune.com/2025/08/04/labor-department-data-fed-interest-rate-cut/.
⁵ "Employers Added Nearly a Million Fewer Jobs Than Believed, Data Shows." The New York Times, September 2025. https://www.nytimes.com/2025/09/09/business/jobs-revisions-economy-fed.html.
⁶ "Household and establishment survey response rates." Office of Survey Methods Research. U.S Bureau of Labor Statistics, June 2025. https://www.bls.gov/osmr/response-rates/.
⁷Summary of Economic Predictions (SEP) contains collated interest path estimates by Federal Reserve Governors for the coming months.
⁸ Bloomberg data: gold-silver price ratio 10/10/2008; 3/18/2020; 4/21/2025.
⁹ Bloomberg data: silver returns 10/10/2008–4/28/2011.
¹⁰ Bloomberg data: silver returns 3/18/2020–2/01/2021.
¹¹ Bloomberg data: silver returns 4/25/2025–9/15/2025.

Important information

The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance is not a guide to future results.

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