Kristian Rouz – Gold prices posted solid gains in US trading Wednesday after the Fed minutes from the latest Federal Open Market Committee (FOMC) were deemed as too dovish to market participants. The US dollar slid despite the central bank saying interest rates would soon go up, as overall macroeconomic data was weaker than expected.
Investor demand for safe havens increased and gold gained the most as the investment appeal of its main competitor, US Treasury notes, tumbled.
Gold’s spot price was up 1.1 percent at $1,293.92/oz., whilst gold futures rose $10.50/oz., or 0.8 percent, to $1,292.20/oz.
The Fed minutes showed policymakers are considering raising interest rates from the current gauge of 1.25-1.50 percent as economic growth is poised to accelerate. The report contradicted the Commerce Department data on domestic investment, stirring concern of a possible monetary policy mistake amongst investors.
"There weren't any surprises within the Fed minutes," Michael Matousek of San Antonio-based US Global Investors said. "You can expect to see the incremental sales of gold, which is walking the fine line between balancing portfolio allocation and interest rate expectation."
Investors say gold will not retreat from its current highs until the Fed does actually raise the rates, which might happen in December. Higher rates would push the dollar’s FX rate, and benchmark Treasury note value higher, rendering gold more expensive overseas. However, on the US market gold might feel the pinch beginning next month.
On the other hand, some expect the Treasury value to decline as US inflation accelerates in line with solid consumer spending and faster economic growth.
"Participants expected solid growth in consumer spending in the near term, supported by ongoing strength in the labor market," FOMC policymakers said in the minutes. "Many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term."
Higher Treasury yields would produce higher market volatility, and support the demand and the price of gold.
"Firmer core inflation readings in the year ahead should push the 10-year Treasury yield higher," Nick Exarhos of Toronto-based CIBC World Markets said.
Analysts at Saxo Bank expect gold to surpass the psychological threshold of $1,300/oz., and reach $1,325/oz. by year’s end.
Higher demand for gold also stems from the expectations of a change in the Fed’s use of policy tools. Some policymakers argue the central bank could abandon its inflation target of 2 percent, and implement price-level targeting, which would allow actual inflation fly above 2 percent.
This, however, would suggest a greater central bank meddling with the open market.
Hints at such a dramatic policy pivot also boosts demand for non-monetary safe haven assets, such as gold, meaning the projections of higher bullion prices in the near-term are justified.