Gold Rebounds on Weaker Dollar as Investors Weigh Fed’s Approach
(Bloomberg) — Gold climbed, recovering from Thursday’s drop, as the dollar sank with investors weighing 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 in the previous session after he signaled the central bank will stay accommodative for longer, with a more tolerant approach on inflation. He said the Fed will seek inflation that averages 2% over time, but won’t hesitate to act if consumer prices rise 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 jumped 1.6% to $1,961.16 an ounce by 12:52 p.m. in London, heading for a weekly gain of 1.1%. The metal is down more than $100 from a record set earlier this month as risk-on sentiment improved, but is still one of the best-performing commodities this year as the coronavirus crisis and massive stimulus measures boosted demand for a haven.
The Bloomberg Dollar Spot Index dropped 0.8% to the lowest since May 2018, with U.S. equity-index futures rising while European stocks retreated. Economic confidence in the euro area continued to improve in August, data on Friday showed, but job cuts in recent months across the continent meant consumers remain worried about the labor market.
“Gold should continue to advance in most equity-market scenarios,” Mike McGlone, a commodity strategist at Bloomberg Intelligence, wrote in a note. “The rising stock tide is increasing diversification demand and declining equity prices would encourage more quantitative easing, the primary force supporting the metal.”
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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