(For more on the gold bear market, see EXT5.)
Sept. 19 (Bloomberg) -- Gold jumped the most in 15 months after the Federal Reserve unexpectedly refrained from reducing the pace of monthly U.S. bond purchases, increasing demand for the metal as a store of value.
The Federal Open Market Committee “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” according to a statement yesterday at the conclusion of a two-day meeting. Spot gold dropped beneath $1,300 an ounce for the first time in six weeks yesterday on speculation the central bank would rein in quantitative easing.
“The markets have been trading based on some sort of reduction of the Fed buying bonds and mortgage-backs,” Michael Cuggino, who manages $12 billion at Permanent Portfolio Family of Funds Inc. in San Francisco, said by phone. “What this does for all those people that are expecting tighter money quick, it’s going to cause them to reassess their portfolios and strategies for next 6 to 18 months. Time will tell as to what the longer-term effects on the marketplace are.”
Gold for immediate delivery climbed 4.1 percent to $1,364.02 yesterday, the biggest gain since June 1, 2012, rebounding from a drop of as much as 1.4 percent to $1,292.02, the lowest since Aug. 8. Bullion fluctuated between gains and losses today and traded at $1,363.20 at 8:12 a.m. Singapore time, taking this week’s gain to 2.8 percent.
Futures for December delivery traded at $1,363 an ounce on the Comex in New York, up 4.2 percent from yesterday’s settlement of $1,307.60 before the Fed announcement. Trading on the Comex today was 15 percent above the average for the past 100 days, according to data compiled by Bloomberg.
Analysts were divided on the amount by which policy makers would scale back its monthly asset purchases. Among 64 economists surveyed by Bloomberg News before the announcement, 33 predicted the Fed would reduce buying of Treasuries by $5 billion or less, while 31 forecast a cut of $10 billion or more.
Spot gold fell 19 percent this year after some investors lost faith in the metal as U.S. equities rallied to a record amid subdued inflation. The commodity, which fell into a bear market in April, headed for the first annual drop in 13 years.
Holdings in exchange-traded funds backed by the metal fell 26 percent in 2013, erasing $56.9 billion of market value. Mining companies reported at least $26 billion in writedowns.
Gold surged 70 percent from the end of December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system by purchasing debt.
“Gold’s upside may be limited if investor expectations shift to a tapering in December,” James Steel, an analyst at HSBC Securities (USA) Inc., wrote in a note to clients. “If the U.S. dollar keeps on the defensive gold is likely to stay firm but additional gains may be limited. The buying witnessed in the aftermath of the FOMC statement is partly short-covering but also some fresh buying.”
Gold futures in New York came within three percentage points of entering a bull market on Aug. 27 as the threat of U.S. military action against Syria boosted demand for a haven. The Standard & Poor’s GSCI Spot Index of 24 raw materials rose the most in three weeks yesterday. The dollar traded near a seven-month low against the euro today.
The Fed said that it needs more evidence of lasting improvement in the economy and warned that an increase in interest rates threatens to curb the expansion.
--With assistance from Glenys Sim in Singapore and Joshua Zumbrun and Jeff Kearns in Washington. Editor: James Poole