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Gold Climbs After Fed Rate Pledge

Jon Boyes | Getty Images

Gold rose on Wednesday as its inflation-hedge appeal received a boost after the U.S. Federal Reserve took an unprecedented step to commit to near-zero interest rates as long as unemployment remains high.

Bullion benefited after the Fed officials revised lower their forecasts for economic growth and inflation next year. The Fed also replaced a more-modest expiring stimulus program with a fresh round of $45 billion Treasury debt monthly purchases on top of the $40 billion per month in mortgage-backed bonds they started buying in September.

In a surprise move, the Fed also adopted numerical thresholds for policy, a step that had not been expected until early next year. It said now it will keep rates near zero until the U.S. unemployment rate falls to 6.5 percent.

Analysts said the move is bullish for gold because it suggests that the U.S. central bank would keep creating new money to stimulate the economy. Many investors buy gold as a hedge against inflation and economic uncertainty as a result of money printing by central banks.

"It takes a little while to sink in that the Federal Reserve is focusing more and more on employment and less and less on inflation," said Axel Merk, chief investment officer of Merk Funds which has $650 million in assets.

Spot gold was up 0.2 percent at $1,713.69 an ounce.

U.S. gold futures for February delivery settled up $8.30 an ounce at $1,717.90, with trading volume about 20 percent below its 30-day average, preliminary Reuters data showed.

The Fed also said it will hold its commitment to hold rates steady until its new threshold as long as inflation was projected to be no more than 2.5 percent one or two years ahead and inflation expectations were contained.

However, traders said that the foremost concern for the Fed right now is job creation rather than keeping inflation low.

Silver, which tends to be more volatile than gold, rose 1.7 percent to $33.51 an ounce.

Economists, however, do not expect a speedy job recovery for unemployment to hit the Fed's new target of 6.5 percent. Last Friday, the Labor Department said that unemployment rate fell to a near four-year low of 7.7 percent as companies kept up their slow but steady hiring pace in November.

"That's a bullish for gold for the Fed to say it will keep interest rates low until unemployment rate drops to 6.5 percent - it doesn't look that's going to happen anytime soon," said Bill O'Neill, partner of commodities investment firm LOGIC Advisors.

Among platinum group metals, spot platinum was up 0.1 percent at $1,634.74 an ounce, while spot palladium gained 0.9 percent to $695.47 an ounce.

Platinum and palladium have outperformed gold in recent months, rising nearly 8 percent and 19 percent respectively since late October, helped by tight supply and a brighter economic outlook in China and the United States.

The planned launch of the Sprott Physical Platinum and Palladium Trust also underpinned sentiment, traders said. The trust could buy more than 107,000 ounces of platinum and 253,000 ounces of palladium, Reuters calculations showed.

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