Gold advances as investors weigh Fed’s new approach on inflation

0:00
play article
Subscribers can listen to this article
Jack Vearey/ Getty
  • Gold climbed as investors weighed the impact of the Federal Reserve’s new approach to setting US monetary policy.
  • Chair Jerome Powell said that the Fed will seek inflation that averages 2% over time, a step that implies allowing for price gains to overshoot. 
  • Higher inflation tolerance and low interest rates should see US real yields fall in the medium-to-longer term, which is supportive of gold, said Vivek Dhar, an analyst at Commonwealth Bank of Australia.


Gold climbed as investors weighed the impact of the Federal Reserve’s new approach to setting US monetary policy, with a more relaxed stance on inflation.

Chair Jerome Powell said that the Fed will seek inflation that averages 2% over time, a step that implies allowing for price gains to overshoot. He also noted that “if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal,” the central bank wouldn’t hesitate to act.

Bullion swung sharply Thursday as investors parsed the speech delivered virtually for the Fed’s annual policy symposium traditionally held in Jackson Hole, Wyoming. It rallied to an all-time high earlier this month as governments and central banks employed stimulus measures to curb the coronavirus pandemic’s damage on economies.Higher inflation tolerance and low interest rates should see US real yields fall in the medium-to-longer term, which is supportive of 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 US 10-year inflation expectations can reach, he said.

“The near V-shape rebound in US 10-year inflation expectations since mid-March is at risk of stalling,” said Dhar. “This is negative for gold and has outweighed the Fed’s inflation-tolerance comments likely because gold markets weren’t expecting Powell’s intolerance for inflation getting too high.”Spot gold advanced 0.6% to $1 941 an ounce at 12:28 p.m. in Singapore. On Thursday, prices slumped as much as 2.3% after rising 1.1%.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.“Gold bulls initially rejoiced the announcement of seeking inflation to average 2% over time, but then quickly came crashing down after noting the inflation overshoots could be moderate,” Edward Moya, senior market analyst at Oanda, said in a note. After the “record long expansion failed to yield inflation, Wall Street is skeptical that the Fed will really see inflation anytime soon even when the economy is beyond the coronavirus.”Since the central bank officially set its inflation target at 2% in 2012, the Fed’s preferred measure of price increases has consistently fallen short of that objective, averaging just 1.4%. That challenge was part of the impetus for the strategy review. Low inflation contributes to low interest rates, which reduces the Fed’s ability to fight off economic downturns - potentially making them deeper and longer.“While the Fed will likely need to ramp up their asset purchases to support the economy, they didn’t provide any signs that will happen soon,” Moya said. “Gold’s path back to record high territory is still there, it will just take a while longer to get there.”

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
ZAR/USD
16.54
(-0.22)
ZAR/GBP
21.42
(-0.18)
ZAR/EUR
19.48
(-0.25)
ZAR/AUD
11.66
(-0.07)
ZAR/JPY
0.16
(-0.11)
Gold
1900.66
(-0.10)
Silver
24.47
(+4.66)
Platinum
856.00
(+0.29)
Brent Crude
42.85
(-0.67)
Palladium
2335.01
(+0.71)
All Share
55161.03
(+0.21)
Top 40
50741.94
(+0.09)
Financial 15
9977.80
(+3.10)
Industrial 25
74762.95
(-0.61)
Resource 10
54129.95
(-0.07)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 1501 votes
It depends on how the funds are used.
73% - 9705 votes
No. We should have gotten the loan elsewhere.
16% - 2155 votes
Vote