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Gold Rebounds as Investors Weigh Fed’s New Approach on Inflation

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(Bloomberg) — Gold climbed, recovering from Thursday’s drop, as the dollar weakened and investors weighed the impact of the Federal Reserve’s new approach to setting U.S. monetary policy.

Comments from Fed Chair Jerome Powell sent bullion on a roller-coaster ride on Thursday after he announced a more relaxed approach on inflation, with the central bank seeking inflation that averages 2% over time. He also noted that the Fed wouldn’t hesitate to act if consumer prices rose considerably above its goals.

Higher inflation tolerance and low interest rates should see U.S. real yields fall in the medium-to-longer term, which is supportive for gold, said Vivek Dhar, an analyst at Commonwealth Bank of Australia. Still, the fact that the Fed will also act if there are inflationary pressures adds doubt to how high U.S. 10-year inflation expectations can reach, he said.

Spot gold advanced 1.2% to $1,953.14 an ounce by 9:33 a.m. in London, heading for a weekly gain of 0.7%. The metal is down more than $100 from a record set earlier this month, but is still one of the best-performing commodities this year after the coronavirus crisis pummeled the global economy, prompting central banks and governments to deploy massive stimulus.

The Bloomberg Dollar Spot Index declined 0.7%, touching the lowest since May 2018.

The Fed’s shift to let inflation and employment run higher may signal that policy makers will keep interest rates low for years to come, lifting the appeal of non-interest-bearing gold. There’s still room for bullion to set new all-time highs, although that may take time, said Ole Hansen, head of commodity strategy at Saxo Bank A/S.

Powell’s “speech did not threaten the bullish narrative for gold and silver,” Hansen said. “Low interest rates for longer, a weaker dollar, massive amounts of stimulus and the increased demand for inflation hedges are likely to continue to drive demand for both metals.”

The biggest risk to gold remains the discovery of a vaccine and a sharp correction in stocks, which would spark a drive to raise cash, he said.

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