Yellen Surprises Gold Bulls in Retreat by Reviving Rally

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Janet Yellen took the gold market by surprise.

Bullion had its biggest rally in a month after Federal Reserve Chair Yellen and her fellow policy makers cut their long-term projections for U.S. interest rates. Money managers had anticipated officials would tighten monetary policy faster and reduced their net-long position in gold to a five-week low the day before the central bank’s statement.

The outlook for gradual rate increases sparked renewed investor interest, and more than $880 million was added last week to the value of assets in exchange-traded products backed by the metal. Higher rates curb bullion’s allure because the commodity doesn’t pay interest or give returns like other assets such as bonds and equities. The Bloomberg Dollar Spot Index fell for two straight weeks.

“The Federal Reserve has signaled they will be moving in a glacial manner, which is causing the U.S. dollar to decrease,” Chad Morganlander, a money manager at Stifel, Nicolaus & Co. in Florham Park, New Jersey, which oversees about $170 billion, said by phone. “There’s an upward bias to gold, and we believe it’s being directly related to dollar weakness.”

Morganlander expects bullion prices to stabilize before being dragged lower by improving U.S. economic growth.

Prices Rally

Futures climbed 1.9 percent to $1,201.90 an ounce last week, the largest advance since May 15. The Bloomberg Commodity Index of 22 raw materials dropped 0.7 percent, while the MSCI All-Country World Index of equities gained 0.2 percent. The Bloomberg Dollar Spot Index fell 0.8 percent. Bullion traded at $1,182.40 at 10:15 a.m. in New York on Monday.

The net-long position in gold declined 4.2 percent to 42,818 futures and options in the week ended June 16, the fourth drop, U.S. Commodity Futures Trading Commission data released Friday show. The number of funds that were long fell 30 percent to 49, the biggest drop since the data began in 2006.

Assets in ETPs rose for four days to 1,586.8 metric tons as of Friday, according to data compiled by Bloomberg. That was the longest stretch since May 1.

Even while Fed policy makers cut their outlook for rates in 2016 and 2017, they signaled that they’re still on track to start tightening this year. The central bank’s benchmark rate has been near a record-low of zero percent since 2008. Officials next meet in late July, followed by mid-September.

September Meeting

Prices may fall to $1,050, the lowest since February 2010, as U.S. rates rise, Mitsubishi Corp. forecast last week.

“The Fed did not rule out September,” said Paul Christopher, the St. Louis-based head of international strategy and co-head of real asset strategy for Wells Fargo Investment Institute, which oversees $1.7 trillion. “Think of gold and interest-bearing paper assets as competitors. If interest rates are going to move a little bit higher and give investors more yield, then they become relatively more attractive.”

Gold swung between year-to-date gains and losses more than 10 times in 2015 as traders tried to gauge the timing of U.S. interest-rate increases.

The commodity’s 30-day volatility rebounded at the end of last week after touching a seven-month low on Tuesday. The market will continue to “churn” until “we get something that moves us to a new environment,” Dan Denbow, a portfolio manager at the $700 million USAA Precious Metals & Minerals Fund in San Antonio, said by phone.

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