Gold Rises to Month High After Fed Rate Hike

By Benjamin Parkin and David Hodari

Gold prices climbed to the highest close in a month on Thursday as traders turned their attention from central banks to geopolitical tension.

Front-month contracts for June delivery rose 0.6% to $1,304 per troy ounce at the Comex division of the New York Mercantile Exchange, the highest close since May 14.

The Federal Reserve on Wednesday said it would raise interest rates by a quarter-percentage point. Higher rates typically weigh on gold prices, prompting investors to ditch the precious metal as they seek yield-bearing assets like bonds. But a number of factors help attract buyers to the market.

On the one hand, the Fed's rate increase was no surprise. Analysts said the decision, along with its expected course of two further increases this year, was largely baked into prices. On the other, the Trump administration's reported plan to levy tens of billions of dollars worth of tariffs on China in the days to come had traders preparing for a new bout of geopolitical upheaval.

"We can talk about monetary policy all you want, but if the real economy is impacted by real politics here and you see a trade war," said Bart Melek, head of commodity strategy at TD Securities, "that will impact investment, that will impact global trade activity and ultimately employment...That is one reason gold is staying at these levels."

Periods of geopolitical uncertainty typically boost demand for gold as a so-called safe haven that can retain underlying value, while other asset classes may see more volatile swings.

Protracted tension between the U.S. and everyone from China to the European Union to Canada has brought limited benefit to the gold market so far, in part because traders were waiting for the outcome of the Fed's interest-rate meeting earlier this week.

At its meeting, the Fed signaled it could lift rates at a slightly faster pace than previously anticipated. Officials projected a total of four rate increases this year, up from three at their previous March meeting. That would leave two more to come in 2018, which many investors already expected. The central bank also strengthened its inflation outlook for the U.S. economy, which some view as positive for gold.

"The move is less about the rate raise from the Fed and more about investors increasing their exposure to gold as an inflation hedge," said Kash Kamal, an associate at BMO Capital Markets.

The European Central Bank on Thursday said it would end its bond-buying program by the end of this year, phasing out an era of easy-money policies, while likely holding off raising interest rates until next year. That sent the euro lower and helped turn the dollar higher.

The WSJ Dollar Index, which measures the greenback against a basket of currencies, rose 0.9% to 87.94 after falling overnight. The stronger currency had a limited impact on gold prices, which tend to suffer with a higher dollar because it makes the precious metal more expensive for foreign buyers.

Some analysts pointed to considerable obstacles for the gold market, despite its resilience on Thursday. Rising interest rates would likely put a ceiling over on prices in the months to come, said Capital Economics.

"We doubt this will mark the beginning of a prolonged rally," the research firm said. "Indeed, while we don't expect prices to plummet, we still think that Fed tightening will prove too strong a headwind for gold prices this year."

Copper prices, meanwhile, fell alongside other industrial metals on fears that Chinese environmental directives may stymie demand. June-dated contracts slid 1% to $3.2165 a pound.

Write to Benjamin Parkin at [email protected] and David Hodari at [email protected]