Gold Prices Gain Sharply after "Definite Shift in Tone" in U.S. Fed Rate Policy and Weaker Dollar

GOLD PRICES fluctuated in a $10 range around $1238 per ounce on Wednesday morning in London after sharp overnight gains, buoyed by a weaker U.S. dollar and Fed’s chair Janet Yellen indication that the U.S. central bank should “proceed cautiously” in raising interest rates, writes Steffen Grosshauser at BullionVault.

Gold rallied by almost 2% from Monday’s one-month low, after Yellen said that inflation has not yet proven durable against the looming global risks to the U.S. economy and the deteriorating world growth, striking a more dovish tone than other policymakers who offered last week their support for a further rate hike as early as April.

“Although the baseline outlook has changed little on balance since December, global developments pose ongoing risks,” Yellen said in her speech in New York. “These risks appear to have contributed to the financial market volatility witnessed both last summer and in recent months.”

“Yellen’s comments clearly indicate that the risk of another delay is significant, particularly if economic data were to unexpectedly weaken and/or financial market volatility to increase again,” the financial services holding company Swiss Credit Suisse wrote in a note.

“Talking to traders from the US, it seemed like there was a definite shift in tone overnight, with investors who were not looking at the metal that favourably last week, changing their tune yesterday and looking to square up, or even go long,” noted the Swiss precious metals services provider MKS.

Precious metal experts also see an increasing interest in the metal in Europe, as the negative rates of the European Central Bank have made depositing cash with banks less rewarding.

“Although gold is very much driven by U.S. Federal Reserve (Fed) policy, the impact of ECB policy decisions may become increasingly relevant for gold price action, as concerns about negative interest rates gain traction among investors,” explained Joni Teves, strategist of the Swiss global financial services company UBS.

In other metals, silver tracked gold and traded around a 1-week high of $15.40 per ounce after yesterday’s rebound, whereas base metals fell an average of 0.9% with copper hitting a three-week low.

Brent crude oil slightly cut earlier losses and was around $40.30, after data showed a smaller than expected build in crude inventories.

In contrast, the U.S. dollar index dropped sharply to an eight-day low and yields on 10-year US Treasuries fell to the lowest level in three weeks after the Fed’s cautious signal.

Gold is still this year’s best performing commodity with prices 17% higher compared to New Year level.

Investor holdings in exchange-traded products have expanded by 300 tonnes, although assets in the giant SPDR Gold Trust saw their first drop in two weeks by falling 0.40% to 820.47 tonnes on Tuesday.

Meanwhile, China’s net gold imports via Hong Kong rose 30% in February from a 17-month low on a month-to-month basis, mainly supported by jewellery trade restocking after a strong Lunar New Year and strong investment demand.  

Looking ahead, “gold will look to consolidate the overnight gains and hold $1,235-1,240, while $1,250 will provide resistance,” noted MKS Group on Wednesday morning.

“We believe that the Fed’s cautious and accommodative stance will form a generally supportive macroeconomic backdrop for gold and the precious metals in the medium term, by keeping the dollar’s strength in check and keeping the yield environment favourable to non-interest bearing assets,” wrote Mitsubishi precious metals strategist Jonathan Butler, considering how the possibility of a slower rate hike would affect the opportunity cost of holding non-yielding gold.

“In the short term however, gold is susceptible to profit taking and is likely to be moved by the US private jobs data today and the non-farm payrolls on Friday.”

Economic data due today includes the ADP non-farm employment change, the German consumer price index and the GfK consumer confidence reading for the UK.