Gold surges on waning dollar, Fed policy shift

Twenty kilogram gold and silver bricks sit at the ABC Refinery smelter in Sydney, New South Wales, Australia, on Thursday, July 2, 2020.
David Gray | Bloomberg via Getty Images

Gold jumped on Friday, a day after a steep sell-off, as the U.S. dollar weakened and the U.S. Federal Reserve signaled a prolonged low interest rate strategy.

Spot gold rose 1.9% to $1,964.62 per ounce, taking gains this week to more than 1%. Prices fell as much as 2.2% on Thursday after U.S. Treasury yields gained following Fed Chair Jerome Powell's speech.

"The sizeable sell-off in the greenback has propped up gold," said David Madden, market analyst at CMC Markets UK.

"The Fed said it can allow inflation to run above its 2% target for some time seems like they are going to keep their monetary policy extremely loose, which should help gold."

The dollar fell to an more than one-week low, making gold cheaper for holders of other currencies, and was on track to post its biggest weekly percentage fall since end-July.

Powell said on Thursday the central bank would adopt an average inflation target, meaning rates are likely to stay low even if inflation rises a bit in future.

On the other hand, global central banks and governments have pumped massive stimulus into the market to prop up their coronavirus damaged economies, helping gold gain over 28% this year.

"The shift in Fed policy will mostly likely reignite 'the inflation trade,' which has historically been bullish for hard assets (like gold)," Kitco Metals senior analyst Jim Wyckoff said in a note.

Low interest rates tend to support gold, which is also a hedge against inflation and currency depreciation.