A week in gold: Gold boosted by dovish comments in Fed minutes

London (Oct 10)  Many, up until the week before, thought it would be a close decision, likely swayed by a member or two one way or the other.

Over the week, gold gained more than 1.5%, around US$20 to US$1,154.

Gold rose as the reasons why the Federal Reserve left interest rates unchanged in September were revealed.

Many, up until the week before, thought it would be a close decision, likely swayed by a member or two one way or the other.

But this week’s Federal Open Market Committee (FOMC) meeting minutes showed it wasn’t.

The Fed’s committee members are worried about the influence of external forces, notably China’s economic slowdown.

The minutes also reveal concern about other risks, including the decline in the oil price, the appreciation of the US dollar and the lower market-based inflation expectations.

“It would therefore seem that the Fed is in no great hurry to implement its first rate hike” Commerzbank said.

Angus Nicholson of spread betting group IG agreed, adding: “The Fed minutes seemed to cement investor expectations for the Fed to delay their first rate rise until 2016.”

The most obvious benefit for gold is that it boosts its appeal compared to interest paying assets such as US bonds.

But there are a number of other benefits for gold.

The dollar, with which gold traditionally has an inverse relationship, has already weakened.

Had a rate rise occurred, people would have wanted the currency to deposit in banks to earn the higher interest rates.

Instead, with rates remaining low, the dollar is less in demand.

Events in Syria have also helped the metal.

Investors have been quick to buy gold as a safe haven in times of global strife.

No one is sure when the Fed will raise rates, but ABN Amro agrees with Commerzbank, taking a rate rise this year off the table.

“Uncertainty is high about the exact month, but our sense is that the first hike will not come until June 2016,” the analyst added.

A delay, it says, will give the Fed time to allow financial conditions to stabilise, external uncertainties to wane and data to improve again.

CME Federal Reserve fund futures, an analytic tool to predict a rate hike, suggest March is the likely date, with a 60% chance of a rise.

ABN, which has been bearish on gold for some time, has revised its price forecast for gold higher, saying the Fed’s decision has forced it to rethink.

It has raised its expectations on the basis that a downgraded US dollar should help to support gold.

“Therefore, we changed our year-end forecast from US$1,000 to US$1,100 per ounce,” the bank said.

It does however, remain bearish longer term on the metal, reiterating a fall to US$900 should occur by the end of next year.

Over the week, gold gained more than 1.5%, around US$20 to US$1,154.

SOURCE: PROACTIVEiNVESTORS.UK