London: Gold fell on Wednesday after a near 3% rally the day before sparked by Federal Reserve comments on possible measures to boost US growth, and the bullion price is still set for its biggest monthly gain in nearly two years.
Minutes from the Fed’s policy meeting on 9 August released Tuesday showed the central bank discussed a range of unusual tools it could use to help the economy and more quantitative easing remains an option.
The Fed has thus far given no explicit signal that it will embark on a third round of purchases of government bonds to keep market interest rates low — a measure known as quantitative easing — meaning markets are increasingly jittery and prone to wild swings in response to measures such as economic data.
Spot gold was last down 0.8% on the day at $1,822.79 an ounce at 0940 GMT, having risen by over 2.6% the day before to a high of $1,839.40.
So far in August, the price has risen by 12.2%, the largest monthly rise since a 12.8% gain in November 2009, compared with a 6.1% loss in the S&P 500 .
“The combination of still-elevated equity market volatility and US data that still looks like it is pointing to potential downgrades to the growth outlook, particularly if confidence is turning lower, will still be quite favourable to gold,” said Deutsche Bank analyst Michael Lewis, whose bank has a price target of $2,000 an ounce for gold.
The gold price has risen by nearly 50% since the Fed signalled in August last year it would inject more stimulus into the economy. Since then, it has also committed to leaving US interest rates near zero for another two years.
Competition heats up?
Low interest rates give gold more of a competitive edge over assets that struggle in an environment of loose monetary policy, such as stocks or currencies, as the premium investors forfeit by owning non-yield bearing bullion over instruments shrinks.
“There is a sense of ‘are we moving towards something that looks like third round of QE?´ Our economists say it’s unlikely but I think it’s a question financial markets are going to continue to ask themselves, (as well as) if we are looking at a period of more serious downturn in economic activity. So for us, gold still continues to move higher.”
The divisions within the central bank on the next course of action are well known.
On Tuesday, Chicago Fed president Charles Evans, a voter on this year’s policy-setting committee, said he favoured the more aggressive tools at the bank’s disposal, while Minneapolis Fed president Narayana Kocherlakota, speaking separately, stopped well short of signalling support for further easing.
The threat to the already-struggling economies of the developed world, such as the United States and the euro zone, from their vast debt burdens has been a major incentive among both private investors and other central banks to own gold.
Data on Wednesday from the International Monetary Fund showed Russia increased its gold holdings again in July to keep its spot as the world’s eighth-largest official holder of bullion, while Colombia raised its reserves for the first time in over 13 years.
The key event risk for the gold market will be the next batch of data on the real US economy, including factory activity in New York State and business activity in the auto-intensive Midwest for August, both due at 1345 GMT.
More measures of nationwide factory activity and the all-important monthly payrolls report are due later this week.
The Fed is scheduled to meet on 20 Sept. to discuss options to help spur the faltering US economy.
“The next data point for gold is some sort of clarity out of the US Fed over the next few weeks on whether they will deliver another round of quantitative easing or not and just let their economy continue on a slow growth path rather than a supported high growth path,” said Tom Price, global commodity analyst at UBS.
In other precious metals, silver was down 0.1% at $41.35 an ounce, while platinum fell 0.1% to $1,847.99 an ounce and palladium was up 0.9% at $777.22.