Gold rises 2% as Fed holds rates steady, markets parse Warsh's comments

Gold erased earlier losses to rise two per cent on Wednesday (July 29), after the US Federal Reserve held benchmark interest rates steady, sending the dollar and Treasury yields lower, while markets digested Chairman Kevin Warsh's remarks.

Spot gold was up 1.9 per cent at US$4,101.99 (S$5,292) per ounce by 2.55pm EDT (Thursday, 2.55am SGT), after rising to its highest level since July 23 at US$4,116.26/oz earlier. US gold futures for August settled around 0.1 per cent lower at $4,036.30.

The Fed held interest rates steady, a choice that may intensify questions about how US central bank chief Kevin Warsh will deliver on his commitment to bring inflation back down to the two per cent target.

The US dollar fell against the euro on Wednesday after the rate decision, making bullion less expensive for overseas buyers, while yields on the benchmark 10-year US Treasury note pared earlier gains.

"Precious metals are leading a modest asset rally even as Chair Warsh sounds quite hawkish overall — it feels like a relief rally after the Fed held rates steady. It's unclear how long this will last. Warsh's diction is sophisticated and fairly complex, so the market may change its mind upon deeper reflection," said Tai Wong, an independent metals trader.

The Fed's Warsh said that the US central bank has no higher "soft target" for inflation and is determined to meet its longstanding two per cent goal despite leaving rates unchanged amid elevated inflation readings.

"The long end of the bond market is panicking and dragging stocks lower into the close. The fear of inflation is helping gold outperform," Wong added, citing gold's traditional property as a hedge against inflation. 

Traders now see a 64 per cent chance of a rate hike in September, compared with around an 81 per cent chance seen before the policy statement, according to CME Group's FedWatch tool. 

Investors await June US Personal Consumption Expenditures data, due on Thursday, for further cues on monetary policy.

Meanwhile, the Bank of England and the Bank of Japan are also widely expected to keep rates unchanged this week, and to caution against mounting inflationary pressure from the Middle East war.

Spot silver climbed 3.2 per cent to US$58.96 per ounce, platinum added 1.9 per cent to US$1,636.10, and palladium firmed one per cent to US$1,281.75.

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