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Gold seen climbing as Yellen sets scene for negative rates

Interest rates to go deeper into negative territory, UBS’s Gordon says.

Gold will rise after the Federal Reserve pledged to stick to its gradual pace of tightening as negative real interest rates deepen and weigh on the dollar, according to Wayne Gordon, executive director for commodities and forex at UBS Group’s wealth management unit.

The Fed raised rates by a quarter percentage-point Wednesday, and policymakers penciled in two more quarter-point increases this year and three in 2018, unchanged from projections in December. Chair Janet Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2% goal and intended to keep its policy accommodative for “some time.”

“Last night was really setting the scene for the next three-to-six months,” Gordon said in a Bloomberg TV interview. “Yellen was very, very clear” that although she sees risks to the economy as balanced and sounded more optimistic, she’s going to stick to three rate hikes this year and three next year, he said. “That means real interest rates go deeper into negative territory in the US, that means a weaker US dollar and it means a better gold price.”

Gold is up almost 7% this year as investors favoured haven assets amid political risks such as the Donald Trump presidency, elections in Europe and the Brexit process. Precious metals are top of Morgan Stanley’s commodity picks. But Societe Generale recommends selling on rallies as it sees gold declining amid further tightening by the Fed and limited impact from political events.

Spot bullion rose 0.7% to $1 227.87 an ounce by 12:15pm in London on Thursday after jumping 1.7% a day earlier, the most in six months. UBS sees gold at $1 300 this year, while Societe Generale has forecast an average of $1 125 in the fourth quarter.

Policy makers forecast inflation will reach 1.9% in the fourth quarter this year, and 2% in both 2018 and 2019, according to quarterly median estimates released with the Federal Open Market Committee statement. The Fed’s preferred measure of inflation rose 1.9% in the 12 months through January, just shy of its target.

© 2017 Bloomberg

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