Gold Jumps After Fed Scales Back Forecasts for Interest Rates

  • Odds of rate increase in June declines after Fed statement
  • Fed statement signals ``weak'' economic growth, Foster says

Gold snapped a three-day losing streak after Federal Reserve officials held off from raising borrowing costs and scaled back forecasts for how high interest rates will rise this year.

The Fed kept the target range for the benchmark rate at 0.25 percent to 0.5 percent, according to a statement Wednesday following a two-day meeting. Policy makers’ updated projections implied two quarter-point increases this year, down from four forecast in December. Lower rates are a boon for gold, which becomes more competitive against interest-bearing assets.

Gold has advanced in 2016 as turmoil in financial markets and the outlook for slower global economic growth boosted demand for the metal as a store of value. In dialing back rate expectations, the Fed said economic and financial developments continue to pose risks. Odds of an interest-rate increase in June fell to 38 percent, from 54 percent on Tuesday. 

The Fed decision “implies that economic growth is weak,” said Joe Foster, who helps manage a $575 million gold fund at Van Eck Associates. “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.”  

Bullion for immediate delivery rose 2.1 percent to $1,258.21 an ounce at 2:51 p.m. in New York. Before the Fed announcement, gold futures for delivery in April fell 0.1 percent to settle at $1,229.80 on the Comex. Prices rallied as much as 2.3 percent in electronic trading after the close.

Prior to the Fed announcement, gold’s rally this year prompted Morgan Stanley to raise its average gold-price estimate by 8 percent to $1,173 an ounce for 2016. Societe Generale SA increased its 2016 forecast to $1,150, from a previous estimate of $1,000.

Holdings in exchange-traded funds backed by gold rose 0.1 percent to 1,734.6 tons on Tuesday, near the highest level since July 2014, according to data compiled by Bloomberg.

Georgette Boele, an ABN Amro Group NV strategist and third-most accurate precious-metals forecaster tracked by Bloomberg in the fourth quarter, said gold is more likely to reach her year-end estimate of $1,300 after the Fed’s statement.

“I think we have seen the low and the momentum is up,” Boele said in an e-mail. “My forecasts may be too conservative.”

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