Gold Climbs Most in Four Months as Fed Plan May Spur Inflation

Gold Climbs Most in Four Months as Fed Plan May Spur Inflation
Bloomberg

By Nicholas Larkin

March 19 (Bloomberg) -- Gold rose the most in four months in New York after the Federal Reserve said it would buy as much as $1.15 trillion in bonds to lower borrowing costs, reviving concern that inflation will accelerate.

The Fed pledged to buy as much as $300 billion of Treasuries, up to $750 billion of bonds backed by government- controlled mortgage companies and $100 billion in debt from other government agencies to loosen credit and bolster the housing market. Gold, which yesterday dropped the most in two months, is up 5.7 percent this year.

“The action of the Fed and other central banks will no doubt fuel inflationary pressures,” James Moore, an analyst at TheBullionDesk.com in London, wrote today in a note. “With no clear plan yet from the U.S. on toxic assets, investors are still likely to favor safer assets.”

Gold futures for April delivery rose as much as $52.50, or 5.9 percent, to $941.60 an ounce in electronic trading on the New York Mercantile Exchange’s Comex division. That’s the biggest intraday increase since Nov. 14. It traded at $937.10 an ounce as of 11:09 a.m. London time.

The metal advanced to $937.25 in the morning “fixing” in London, used by some mining companies to sell production, from $893.25 at yesterday’s afternoon fixing. Bullion for immediate delivery in London traded down 0.6 percent at $936.49 an ounce. Prices had jumped about $56 after the Fed announcement before the London market closed. Comex closed before the announcement.

‘Far From Recovery’

“The effects of the announcement were magnified as it portrayed the fact that perhaps the economy is far from recovery,” Emanuel Georgouras, a precious-metals trader at Marex Financial Ltd. in London, wrote today in a note. “Should quantitative easing continue, you can expect to see further gains in gold.”

The Fed kept its main rate at almost zero and may keep it there for an “extended” time. Central banks are lowering interest rates and spending trillions of dollars in response to the worst financial crisis since the Great Depression. That may devalue currencies and boost demand for bullion as an alternative investment.

The dollar yesterday fell against a weighted basket of six major currencies and today traded lower for an eighth day. Gold historically has moved inversely to the U.S. currency, though the correlation hasn’t held for much of 2009 as investors sought the safety of both assets.

Investors are continuing to buy gold in a bid to protect their wealth. Assets in the SPDR Gold Trust, the biggest ETF backed by bullion, expanded 1.4 percent to a record 1,084.33 metric tons yesterday, according to the company’s Web site.

Exchange-Traded Products

ETF Securities Ltd.’s exchange-traded products backed by bullion attracted almost $134 million last week, the company said today.

Gold’s climb since yesterday is “insane” because U.S. inflation may not accelerate until 2011, said Peter Fertig, owner of Quantitative Commodity Research Ltd.

“There’s no real spillover from the monetary system to the real economy yet,” Fertig said today by phone from Hainburg, Germany. “The U.S. is far from inflationary pressures. It will take some time before the gap is closed.”

Among other metals for immediate delivery in London, silver futures advanced 7.8 percent to $12.86 an ounce. Platinum added 2.1 percent to $1,064.50 an ounce, and palladium rose 1.7 percent to $198 an ounce.