Yellen Revives Gold Rally as Fed Scales Back Rate Outlook

Just when gold’s rally was losing steam, Janet Yellen came to the rescue.The Federal Reserve on Wednesday signaled it...

Just when gold’s rally was losing steam, Janet Yellen came to the rescue.

The Federal Reserve on Wednesday signaled it won’t raise interest rates as much this year as forecast in December amid weakening global economic growth, sending gold prices surging just after the metal capped the longest slump since November. Lower rates are a boon for gold, which becomes more competitive against interest-bearing assets.

“There’s a growing realization that all isn’t well with the world economy,” Gavin Wendt, founding director at MineLife Pty Ltd. in Sydney, said by e-mail. “At the same time, investors are extremely concerned with the rationality of decision-making by central banks around the world — especially as they take us down the path of negative interest rates — which is essentially an unchartered course. Gold’s prospects look very bright indeed.”

After advancing this year through early March as turmoil in financial markets helped boost demand for the metal as a store of value, gold’s rally had been sputtering. Futures posted losses in seven of the past eight sessions, as signs of an improving U.S. economy reignited speculation that rate increases were looming. In dialing back expectations, the Fed said economic and financial developments continue to pose risks.

The Fed decision “implies that economic growth is weak,” said Joe Foster, who helps manage a $575 million gold fund at Van Eck Associates in New York. “A weak economy and the inability to have effective monetary policy creates all sorts of financial risks, risks in the banking system, risks to the economy, and those type of systemic risks are what gold rises on.”

Gold futures for April delivery on the Comex in New York climbed 2.4 percent to $1,259.30 an ounce at 7:46 a.m. Singapore time, having settles lower for a fourth straight session in the longest slump since Nov. 6. Bullion for immediate delivery rose as much as 2.6 percent on Wednesday following the Fed announcement, before trading 0.3 percent lower at $1,258.70 on Thursday, according to Bloomberg generic pricing. 

Earlier this month, gold had surged into a bull market amid mounting expectations that Fed Chair Yellen wouldn’t follow through on her forecast for raising rates further this year.

The Fed kept the target range for the benchmark rate at 0.25 percent to 0.5 percent, according to a statement Wednesday following a two-day meeting. Policy makers’ updated projections implied two quarter-point increases this year, down from four forecast in December. Odds of an interest-rate increase in June fell to 38 percent, from 54 percent on Tuesday. 

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“Gold’s reign as the top performing asset since the start of the year is largely supported by safe haven demand, and buying-interest into gold once again should not be discounted especially if global growth sentiment turns south into the year,” Barnabas Gan, an economist at Oversea-Chinese Banking Corp., said by e-mail. “Still, this is not our base case scenario, given our bearish outlook on gold prices.”

The outlook for gold is underpinned by further rate hikes from the Federal Open Market Committee which “would lift the greenback and in turn, dull gold as a store of value,” he said. The Singapore-based bank’s year-end forecast is at $1,100, said Gan who’s the top precious metals forecaster as ranked by Bloomberg.

Gold’s 14-day relative-strength index, an indicator that tracks momentum, rebounded from the lowest in two months. Georgette Boele, an ABN Amro Group NV strategist and third-most accurate precious-metals forecaster tracked by Bloomberg in the fourth quarter, said gold is more likely to reach her year-end estimate of $1,300 after the Fed’s statement.

“I think we have seen the low and the momentum is up,” Boele said in an e-mail. “My forecasts may be too conservative.”

To contact the reporters on this story: Luzi Ann Javier in New York at ljavier@bloomberg.net, Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net. To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Jason Rogers at jrogers73@bloomberg.net, Rebecca Keenan

By: Luzi Ann Javier and Ranjeetha Pakiam

©2016 Bloomberg News

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