Yellen revives gold rally as Fed scales back rate outlook

Janet Yellen speaks during a news conference on March 16, 2016 in Washington, DC.
Janet Yellen speaks during a news conference on March 16, 2016 in Washington, DC. PHOTO: AFP

SINGAPORE (BLOOMBERG) - Just when gold's rally was losing steam, Janet Yellen came to the rescue.

The Federal Reserve on Wednesday (March 16) signaled it won't raise interest rates as much this year as forecast in December amid weakening global economic growth, sending gold prices surging just after the metal capped the longest slump since November.

Lower rates are a boon for gold, which becomes more competitive against interest-bearing assets.

"There's a growing realization that all isn't well with the world economy," said Gavin Wendt, founding director at MineLife Pty Ltd in Sydney. "At the same time, investors are extremely concerned with the rationality of decision-making by central banks around the world - especially as they take us down the path of negative interest rates - which is essentially an unchartered course. Gold's prospects look very bright indeed."

After advancing this year through early March as turmoil in financial markets helped boost demand for the metal as a store of value, gold's rally had been sputtering. Futures posted losses in seven of the past eight sessions, as signs of an improving US economy reignited speculation that rate increases were looming. In dialing back expectations, the Fed said economic and financial developments continue to pose risks.

The Fed decision "implies that economic growth is weak," said Joe Foster, who helps manage a US$575 million gold fund at Van Eck Associates in New York. "A weak economy and the inability to have effective monetary policy creates all sorts of financial risks, risks in the banking system, risks to the economy, and those type of systemic risks are what gold rises on."

Gold futures for April delivery on the Comex in New York climbed 2.4 per cent to US$1,259.30 an ounce at 7:46 am. Singapore time, having settles lower for a fourth straight session in the longest slump since Nov 6. Bullion for immediate delivery rose as much as 2.6 per cent on Wednesday following the Fed announcement, before trading 0.3 per cent lower at US$1,258.70 on Thursday, according to Bloomberg generic pricing.

Earlier this month, gold had surged into a bull market amid mounting expectations that Fed Chair Yellen wouldn't follow through on her forecast for raising rates further this year.

"Gold's reign as the top performing asset since the start of the year is largely supported by safe haven demand, and buying-interest into gold once again should not be discounted especially if global growth sentiment turns south into the year," said Barnabas Gan, an economist at Oversea-Chinese Banking Corp. "Still, this is not our base case scenario, given our bearish outlook on gold prices."

The outlook for gold is underpinned by further rate hikes from the Federal Open Market Committee which "would lift the greenback and in turn, dull gold as a store of value," he said. OCBC's year-end forecast is at US$1,100, said Mr Gan who's the top precious metals forecaster as ranked by Bloomberg.