Yellen Gives Gold Bulls Biggest Rally on Rates Since January

by Lydia Mulvany

Janet Yellen, chair of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee meeting in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

Traders'

(Bloomberg) -- Janet Yellen gave gold bulls a gift when she signaled policy makers aren’t rushing to raise interest rates.
Gold had its biggest weekly gain in two months on the prospect that U.S. rates will stay lower for longer. The value of assets in exchange-traded funds backed by bullion rose by $885 million, also the most since January.
The dollar had the steepest weekly slide since 2011 after Federal Reserve Chair Yellen and her colleagues cut their forecast on U.S. rates March 18. That revived interest in gold, which generally offers returns only through price gains. Some money managers misjudged the move, cutting their net-long position in gold futures to the lowest level since 2013 the day before the Fed statement.

“The market sentiment is that the Fed is going to take it easy, and that’s why the dollar has stopped gaining and gold moved up,” Donald Selkin, who helps manage about
$3 billion as chief market strategist at National Securities Corp. in New York, said by phone March 20. “All of the experts got bearish right at the bottom.”
Gold futures, which jumped 2.8 percent to $1,184.60 an ounce last week to erase this year’s decline, traded 0.3 percent lower at $1,181.20 on Monday. The Bloomberg Commodity Index of 22 raw materials rose 2 percent last week, as the Bloomberg Dollar Spot Index fell 2.2 percent. The MSCI All-Country World Index climbed 3.2 percent.

Rate Forecast

Fed officials on March 18 lowered their estimates for where borrowing costs will be at the end of 2015 to 0.625 percent, from December’s estimate of 1.125 percent. Traders had been exiting precious metals in anticipation of steeper rate gains, which usually send investors to assets with better yield prospects such as equities and bonds.
The net-long position in gold declined by 46 percent to 35,121 futures and options in the week ended March 17, according to U.S. Commodity Futures Trading Commission data published three days later. That was the lowest since Dec. 31, 2013, and the biggest cut since June 2007.
Part of the problem for gold, a traditional hedge against inflation, is that investors are confident the Fed will start lifting benchmark rates from near zero fast enough to prevent consumer prices from surging as the economy rebounds. The benchmark U.S. rate has been at a record low since 2008, and the Bloomberg Dollar Index, a measure against a basket of 10 currencies, is trading near its highest in at least a decade.

Top Forecaster

Artur Passos, who produces the metals outlook at Itau Unibanco Holding SA, said his bearish view on gold hasn’t changed after the Fed statement. Prices will post a third straight annual decline in 2015, according to Passos, who was the most accurate among 20 gold forecasters over the past two years, data compiled by Bloomberg Rankings show.
“We haven’t seen any significant whiff of inflation, and the strong dollar usually works against gold prices in the U.S.,” Walter “Bucky” Hellwig, who helps manage $17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama, said by phone March 19. “We’re looking at it moving in the trading range in the last six months. Gold doesn’t seem to have much momentum either way.”
Open interest in New York futures and options climbed 13 percent in three weeks ended March 17, CFTC data show. Contracts outstanding reached 667,988, the highest since Jan. 20. The gains signal that some consumers are locking in recent prices, including jewelry makers, according to George Gero, a New York-based precious metals strategist who helps manage $750 million at RBC Capital Markets LLC.

Slower Pace

Even as the policy makers signaled they will tighten at a slower pace, they dropped a pledge to be “patient” on increases in a statement issued at the conclusion of a meeting March 18. Still, the officials said they won’t raise rates until they’re “reasonably confident” inflation will return to their target and the labor market improves further.
Gold dropped 29 percent in the previous two years as the dollar surged and inflation remained low. Prices climbed 70 percent from December 2008 to June 2011 partly as the Fed held interest rates near a record low.
“Even as the Fed took the ‘patient’ language out, they led the market to believe they’ve moved the bar as to what it’s going to take to raise interest rates,” Michael Cuggino, who manages about $5.1 billion at Permanent Portfolio Family of Funds Inc. in San Francisco, said by phone March 20. “Realistically, the thing with gold, is it’s gone from $1,150 to $1,180, it’s not that big of a move. For an investor who would like to build a position, it’s a lot cheaper than it was a few years ago.”