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Gold rose on threat of halted interest rate increases Original Source Link: (May no longer be active)
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Gold in New York Rises Most Since September 2001 (Correct)
(Corrects extraneous word in fourth paragraph.)
June 30 (Bloomberg) -- Gold in New York surged the most since the Sept. 11 terrorist attacks in the U.S. after the Federal Reserve suggested it may take a break from raising interest rates, eroding the value of the dollar.
Gold jumped 4.6 percent to $616 an ounce after the Fed yesterday said more rate increases may be needed only if statistics warrant. The dollar fell against the euro on speculation the European Central Bank may raise rates faster than in the U.S. Gold is up 16 percent this year as the dollar fell 7.3 percent against the euro. Silver also gained.
Comments by the Fed are ``very friendly to the gold market,'' said Michael Guido, director of hedge fund marketing and commodity strategy at Societe Generale in New York. ``All the sideline buyers are thinking this could be the bottom of the gold market for the year. There's a lot more confidence to adding to positions.''
Gold futures for August delivery rose $27.10 on the Comex division of the New York Mercantile Exchange. The 4.6 percent gain was the biggest since Sept. 14, 2001, the first day of trading after the terrorist attacks closed U.S. markets. The metal reached a 26-year high of $732 on May 12.
Gold for immediate delivery rose $14.80, or 2.5 percent, to $614.45 an ounce at 7:20 p.m. in London. The metal gained about 4.4 percent in the second quarter, its fifth straight quarterly increase.
Silver futures for September delivery rose 57.5 cents, or 5.5 percent, to $10.995 an ounce on the Comex, the biggest fluctuation of any commodity today.
Rate Expectations
The Philadelphia Stock Exchange Gold and Silver Index of 16 companies rose, led by silver producer Coeur d'Alene Mines Corp. and Kinross Gold Corp. The index gained 2 percent to 143.57, the highest settlement since May 16.
Interest-rate futures show traders see 59 percent odds of a quarter-percentage point increase in the overnight lending rate between banks, to 5.5 percent, in August. Two days ago, the figure was 85 percent.
``The Fed's comments yesterday indicate there is going to be no more interest-rate increases and this is pushing up gold,'' said Ron Schouten, a precious-metals trader at Hollandsche Bank-Unie in Amsterdam. ``The stronger euro-dollar is also helping.''
Fed officials are trying to avoid a hard landing for the U.S., where higher t rates may restrain job growth and curtail spending. The Fed had increased rates for 17 straight times to curb inflation.
Inflation Pressure
U.S. consumer prices climbed at an annual rate of 5.2 percent in the five months ended May, up from 3.6 percent a year earlier. Excluding food and energy, so-called core prices rose at an annual rate of 3.1 percent, compared with a 2.4 percent gain a year earlier.
``The combination of inflation pressures and a slowdown in economic growth are positive for gold,'' said Michael Widmer, an analyst at Macquarie Bank Ltd. in London. ``There is limited scope for the U.S. dollar to move higher now. Some uncertainty has been removed.''
Investors buy gold as an alternative to the dollar.
``The psychology now is to sell the dollar and buy the euro and other currencies,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York.
Since April 1, the correlation between gold and euro has increased to 0.55, compared with 0.37 in the first quarter. The coefficient measures to what degree two variables move in lockstep. The dollar weakened to $1.2786 per euro at 1:17 p.m. in New York, from $1.2664 late yesterday, reaching the lowest since June 8.
European Confidence
A report today showing European confidence in the economy was the highest in five years ``is fueling speculation the EU will have to speed up rate hikes in the region,'' said John Licata, chief investment strategist for Blue Phoenix Inc., a precious-metals and energy firm in New York. ``The dollar is under heavy pressure against the euro, which is causing a nice premium in gold prices.''
The Fed yesterday raised its overnight lending rate by a quarter-point to 5.25 percent. Some investors interpreted accompanying statements to mean the central bank may pause after nudging rates higher at each meeting for two years.
Gold as Insurance
``Gold looks more attractive,'' said Zach Liggett, who helps manage $550 million in individual accounts and the Utopia Fund at Traverse City, Michigan-based Financial & Investment Management Group. ``It's good to have gold as insurance in case central banks lose their nerve and slow down this tightening campaign.''
An end to the cycle of interest-rate increases by the Fed would leave the European Central Bank set to outpace its American counterpart, after ECB policy makers this week said they may quicken their pace of rate boosts.
``We've increased our investments on gold,'' said Christoph Eibl, head of commodities trading at Tiberius Asset Management AG in Stuttgart, Germany. ``There's dollar weakness and oil prices are strong.''
Crude oil rose for an eighth straight day, approaching $74 a barrel. Prices are up 21 percent this year.
To contact the reporter on this story:
Julie Tay in London at jtay1@bloomberg.net;
Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.
Last Updated: June 30, 2006 16:36 EDT
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