# Why gold rallied after the Fed news
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Why gold rallied after the Fed news
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Gold futures touched their highest intraday level in more than two weeks late Wednesday afternoon, as prices reacted to the U.S. Federal Reserve’s decision to keep its benchmark interest rate unchanged near zero, likely for the next two years.
Inflation is likely a key worry for investors, analysts said, though the Fed said Wednesday that it will tolerate inflation slightly above target to make up for the years inflation has been below 2%. Gold is often used as a hedge against inflation.
The central bank said it didn’t think it would raise interest rates until the end of 2023, even amid signs of stronger economic growth and higher inflation.
The Fed raised its forecast on GDP growth this year to a 6.5% annualized rate, from 4.2%. It expects inflation to slow to 2% in 2022 before picking up slightly to 2.1% in 2023.
Read the blog: Fed faces communication challenge as doubts mount about its easy policy stance
What’s interesting is that the Fed officials “made no mention of recent rises in yields, nor any effort to combat those movements,” in the statement released Wednesday, said Jason Teed, co-portfolio manager of the Gold Bullion Strategy Fund
QGLDX,
While they appear to be “acknowledging that some economic indicators have improved, it looks as though their current policy will remain for the time-being until a stronger recovery is realized.”
“We may anticipate more of the same recent action in the bond markets,” though despite longer-term yields rising on the news, gold prices jumped higher immediately after Wednesday’s Fed announcement and the dollar fell, “indicating perhaps that inflation may once again be a concern for the markets,” said Teed, who is also director of research for asset manager Flexible Plan Investments.
Following the Fed news, the dollar weakened, with the ICE U.S. Dollar Index
DXY,
down 0.4% at 91.472 late Wednesday afternoon. The 10-year Treasury note yield was up 1.2 basis points at $1.628%, though below the day’s high above 1.68%, which was the highest since January 2020.
“The rise in longer-term Treasury rates has mainly been powered by increased inflation expectations and not by a significant rise in real rates,” which is supportive of gold prices, said Jeff Klearman, portfolio manager at GraniteShares, which offers the GraniteShares Gold Trust
BAR,
adding that real yields are still “significantly negative,” so there’s no opportunity cost to holding gold. That’s supportive for the precious metal’s prices.
Read: Gold settles lower, then climbs after the Fed policy decision
By
Myra P. Saefong
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