Gold Climbs Most Since January as Fed Officials Cut Rate Outlook

San Francisco (Mar 18)  Gold prices climbed the most since January as Federal Reserve officials said an increase for interest rates is unlikely next month and cut their outlook for borrowing costs.

U.S. economic growth has “moderated somewhat” and inflation has declined further below where officials would like it, the Federal Open Market Committee said in a statement Wednesday. The policy makers lowered their median estimate for the federal funds rate at the end of 2015 to 0.625 percent, compared with 1.125 percent in December forecasts.

Through March 17, gold prices fell almost 3 percent in 2015 on concern that rates would rise, cutting the appeal of the metal, which generally offers returns through price gains. The benchmark rate has been near zero since 2008.

“The focus is on inflation now, and since we have such prevailing low inflation rates, gold traders believe that the rate hike is not coming anytime soon,” Mike Meyer, a vice president at EverBank Wealth Management in St. Louis, said in a telephone interview. “People are reading this as dovish for gold.”

Gold for immediate delivery climbed 1.3 percent to $1,164.39 an ounce at 2:37 p.m. in New York, heading for the biggest gain since Jan. 30.

Investors had exited gold in anticipation of a nearby increase for borrowing costs, which lifts the appeal of assets with better yield prospects such as bonds and equities. More than $4 billion has been wiped from the value of exchange traded funds backed by bullion in March, heading for the biggest monthly drop since September.

‘Reasonably Confident’

While policy makers dropped an assurance it will be “patient” in raising interest rates, they said that it would be appropriate to tighten when they are “reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Inflation, as measured by the Fed’s preferred gauge, has languished below the central bank’s 2 percent goal for 33 straight months.

“Clearly, the Fed is farther away from a rate hike based on the inflation outlook,” Tai Wong, the director of commodity products trading at BMO Capital Markets Corp. in New York, said in a telephone interview. “They took out ‘patience,’ but the outlook is more dovish.”

Goldman Sachs Group Inc. said in a March 13 report that the metal would fall to $1,100 in the next 12 months.

“In line with our economist’s forecasts for continued growth, labor market recovery and increase in U.S. real rates, we maintain our long-held bearish outlook on gold prices,” Goldman said. “We have greater confidence in our longer-term directional bearish view on gold, while recognizing that the next few months could see higher volatility
 

Source: Bloommberg