US Fed move sends gold soaring

Stacked gold bars produced by Toronto-based Barrick Gold. Credit: Barrick GoldStacked gold bars produced by Toronto-based miner Barrick Gold. Credit: Barrick Gold

The gold price surged on Monday after the U.S. Federal Reserve promised to pump “unlimited” amounts of money into the financial system, boosting the metal’s status as a store of wealth and an inflation hedge.

On the Comex market in New York, gold for delivery in April, the most active contract, closed just off its day high at US $1,567.60 per oz., up US$83.00 or 5.6% compared to Friday’s close.

Monday was the biggest one-day dollar gain in the history of gold trading, surpassing the Oct. 25 2011 advance of more than US$70 per oz. that took the price above US$1,700. In percentage terms, Monday’s performance is the best in over a decade.

On Monday, the Fed committed to unlimited purchases of U.S. Treasuries and agency mortgage-backed securities, flooding financial markets with easy money.

“The Federal Reserve is committed to using its full range of tools to support households, businesses, and the US economy overall in this challenging time,” the Fed said in a statement.

“The Fed unveiled its biggest cannon seen to date – even bigger than in the great financial crisis,” Tai Wong, head of base and precious metals derivatives trading at BMO told Reuters news agency. “The market reacted instantly with equities and gold soaring behind the Fed’s new ‘Draghi’ approach. However, the acid test here is whether this optimism will hold for more than one day.”

Matthew McLennan, head of the global value team at First Eagle Investment Management, which manages about US$101 billion in assets told Bloomberg: “When the Fed progressively removes liquidity fears, provides forward guidance on rates, and when it possibly even controls the yield curve, and the economic softening is observable across the whole economy, the potential hedge value of gold can reassert itself powerfully.”

Gold has been on a wild ride over the past weeks, dropping as low as US$1,450 per oz. one week ago after briefly hitting a seven-year high above US$1,700 a week earlier.

This article first appeared in our sister publication, Mining.com


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