Gold stronger before giving up gains after Fed rate cut

Bengaluru — Gold prices jumped in early trade on Monday after another emergency rate cut by the US Federal Reserve, before paring gains as some investors sold the metal for cash amid a sell-off in equities.

Spot gold was up 0.9% at $1,543.60 per ounce by 4.48am, having risen as much as 2.8% earlier. The metal fell 3% on Friday. US gold futures rose 1.8% to $1,544.20 per ounce.

Prices rose initially due to the surprise Fed rate cut, said CMC Markets analyst Margaret Yang Yan, adding that: “The market is very indecisive and there are divergent opinions. Investors are now dumping everything. They just want cash.”

The Fed slashed rates back to near zero, restarted bond buying and joined with other central banks to help put a floor under a rapidly disintegrating global economy amid the escalating coronavirus pandemic.

The Fed’s rate cuts and restarting of quantitative easing are positives for gold, but “we’re in an unconventional time and theory might not apply in a time of high volatility and divergence”, Yan said.

The dollar fell from a more than two-week high and stock markets plunged after the Fed cut rates for the second time this year to soften the economic blow from the economic shock.

Apart from reducing the opportunity cost of holding non-yielding bullion, lower interest rates weigh on the dollar, making greenback-denominated gold cheaper for investors holding other currencies.

The benchmark US 10-year Treasury yields fell, resuming its march towards an all-time low touched last week, while the safe-haven yen rose from a two-week low against the dollar. A widespread pandemic causing a global shutdown, emergency rate cuts and falling US dollar should be “nirvana for gold”, Jeffrey Halley, a senior market analyst at Oanda, said in a note.

“Unfortunately, these are not normal times and the usual rules don’t seem to apply any more. If equities drop further, liquidation of gold long positions seems inevitable,” he said.

After the Fed’s footsteps, the New Zealand central bank slashed rates to a record low, while EU finance ministers plan to agree on a co-ordinated economic response.

Among other precious metals, palladium fell 3.2% to $1,748.63 per ounce, having fallen more than 5% earlier in the session, while platinum slipped 0.4% to $758.50. Silver gained 0.4% to $14.74 per ounce.

Reuters