A Little Birdie Told Me: What a 50-Basis Point Cut Means for Gold as well as the usual beneficiaries

Might Investors Experience a Market's Paradox: Risk-On... and Gold Miners?

My little birdie – aided by what I saw in global market trading today -- tells me that the FOMC might decide on a larger-than-expected interest rate cut. They might cut by 50 basis points. If that were to happen, it would have a significant impact on several key industries and their corresponding stocks. We should be prepared.

Today's market prices worldwide favored "risk-on" sentiment, which typically sees investors move away from safe-haven assets. However, this is a unique moment where the anticipation of a major monetary policy shift is the more dominant force. The market is bidding up risky assets on the expectation of easier money, but that very same expectation is a powerful catalyst for gold, making a surge in gold miners a very real possibility, not tomorrow possibly, but throughout the week.

Sectors that are highly sensitive to borrowing costs and consumer spending would be most heavily affected.

Industries that would likely see a positive impact from a 50 b.p. cut include:

· Real Estate and Homebuilding: Lower interest rates directly lead to lower mortgage rates, which can stimulate housing demand and make home purchases more affordable. This would benefit homebuilders like D.R. Horton and Lennar, as well as companies that supply building materials.

· Technology and Growth Stocks: Companies in the technology sector, particularly those with high growth potential, often rely on borrowing for expansion and investment. Lower interest rates reduce their cost of capital, making it easier to finance new projects and boosting their valuations.

· Consumer Discretionary: Cheaper borrowing for consumers through things like credit cards and car loans can free up disposable income, leading to increased spending on non-essential goods and services. This would benefit retail, travel, and entertainment companies.

· Goldminers: There is an inverse relationship between interest rates and the price of gold. When interest rates are cut, the opportunity cost of holding non-yielding assets like gold decreases, making it more attractive compared to interest-bearing assets. This is the primary driver. US institutions will buy Newmont. I prefer Agnico-Eagle, Alamos Gold, and Kinross.

Additionally, lower rates can weaken the US dollar, which makes gold cheaper for international buyers, further boosting demand. As the price of gold rises, it directly benefits gold mining companies. Since their production costs are relatively fixed, a higher gold price leads to wider profit margins. This should result in increased free cash flow, which companies can use for dividends, share buybacks, or to fund new projects. But, the stocks are a "leveraged" play on the precious metal.

Historical Context: A Leveraged Play

History shows that gold mining stocks have a track record of outperforming during periods of economic distress and central bank easing. For example:

· During the 2008 Financial Crisis, the NYSE Arca Gold Miners Index surged 100% from October 2007 to March 2009, while the S&P 500 plummeted 57% over the same period.

· In the 2019-2020 easing cycle, the VanEck Gold Miners ETF (GDX) rallied 130% in just six months following the COVID-19 market crash, significantly outpacing the 25% gain in physical gold.

This "leveraged" effect is due to the fact that when gold prices rise, a gold mining company's profit margins expand dramatically, leading to a much larger increase in its share price.

On the other hand -- and this is very important -- a substantial rate cut would likely be a negative for the Financials sector, particularly for banks. Lower rates can compress the net interest margin—the difference between the interest banks earn on loans and the interest they pay on deposits—which can negatively impact their profitability.

Perhaps that’s the reason that today inter-bank lending as seen by the Secured Overnight Financing Rate “$SOFR” rang the alarm bell.

My recommendation for Wednesday’s Fed watch: Focus on regional banks ETFs, such as the SPDR S&P ETF (KRE) or iShares ETF (IAT), or the BMO Covered Call US Banks ETF (ZWK).

For sure, unlike the usual event, tomorrow’s FOMC decision will command world attention. President Trump will certainly be tuned in via Air Force One somewhere above the mid-Atlantic on his return from London to the White House.