Gold climbed on Friday, recovering from Thursday’s drop, as the US dollar sank with investors weighing the impact of the US Federal Reserve’s new approach to setting monetary policy.
The metal rose the most in almost two weeks and the US dollar touched a two-year low a day after Fed Chairman Jerome Powell said that the central bank would seek inflation that averages 2 percent over time.
His comments sent bullion on a roller-coaster ride in the previous session, as he signaled the central bank would stay accommodative for longer, with a more tolerant approach on inflation, but would not hesitate to act if consumer prices rise considerably above its goals.
Photo: Bloomberg
Gold on Friday strengthened due to “a more measured appraisal of the shift in Fed nuances, along with a weakening dollar, for the same reason,” Rhona O’Connell, head of market analysis for EMEA and Asia regions at StoneX Group, said in an e-mailed note.
Higher inflation tolerance and low interest rates should see US real yields fall in the medium-to-longer term, which is supportive for gold, said Vivek Dhar, an analyst at the Commonwealth Bank of Australia.
Still, the fact that the Fed would also act if there are inflationary pressures adds doubt to how high US 10-year inflation expectations can reach, he said.
PRICES
Spot gold rose 1.98 percent to US$1,967.11 an ounce, up 1.45 percent for the week — its first weekly gain in three weeks.
The metal is down more than US$100 from a record set earlier this month as risk-on sentiment improved, but it is still one of the best-performing commodities this year after the COVID-19 crisis and massive stimulus measures boosted demand for havens.
Gold futures for December delivery rose 2.2 percent to settle at US$1,974.90.
The Bloomberg Dollar Spot Index dropped 0.9 percent to the lowest since May 2018, while US equities rose.
Economic confidence in the euro area continued to improve this month, data showed on Friday, but job cuts in the past few months across the continent mean consumers remain worried about the labor market.
In the US, the rebound in consumer spending slowed last month as virus cases rose in some states.
NO THREAT
The Fed’s shift to let inflation and employment run higher might signal that policy makers will keep interest rates low for years to come, lifting the appeal of non-interest-bearing gold. There is still room for bullion to set new all-time highs, although that could 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.
Additional reporting by Reuters
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