Federal Reserve gives gold a reason to rise

The U.S. Federal Reserve didn’t make any sort of surprise announcement on Wednesday, but it did give gold futures a reason to climb even further as the market breathed a collective sigh of relief.

About an hour after the Fed said it would leave interest rates unchanged, but offered some hints on the potential for a rate increase before the end of the year, December gold futures GCZ6, +0.71% were trading at $1,334.30 an ounce. That’s above Wednesday’s settlement price of $1,331.40.

Read: Fed stands pat on interest rates ‘for time being’

The central bank sent a “mixed message to the markets,” and investors continue to “question if the [Federal Open Market Committee] will be able to move by year-end,” said Chris Gaffney, president of World Markets at EverBank.

Precious metals tend to draw buying in a low interest-rate climate as rising rates tend to make non yielding gold less attractive to investors. Higher rates may also boost the value of the dollar which usually moves in the opposite direction of the gold price.

‘Investors will have to start discounting all of the rhetoric from Fed official predicting a sharp increase in the economic environment.’

Fed Chairwoman Janet Yellen has “done her best to try and convince investors that conditions will improve enough by December to support a rate increase,” said Gaffney. “But we’ve heard this song before and I think investors will have to start discounting all of the rhetoric from Fed official predicting a sharp increase in the economic environment.”

Gaffney said he’s not convinced that the central bank will be in a better position to raise rates in December.

See the live blog of Yellen’s press conference

And if rates remain lower for longer, that will provide a “floor for gold prices,” he said.

He expects gold prices to drift higher through the end of the year, barring any “black-swan shocks which could propel them dramatically higher.”

By year-end, gold could be trading around $1,400, he said, an advance of more than 4% from current levels.

But with the September Fed decision out of the way, investors will be focusing their attention on the U.S. presidential election, said Gaffney.

The election in November will “supply the markets with additional uncertainty,” with the first presidential debate Monday promising to provide some “serious political theater.” The election uncertainty should underpin prices for gold, he said.

Market Watch
9/22/2016
Myra Saefong