Gold Rises After Fed’s Surprise Rate Cut

(March 3, 2020 - Reuters)

Gold prices rose on Tuesday after the Federal Reserve announced an emergency rate cut Tuesday of half a percentage point in response to the growing economic threat from the novel coronavirus.

Spot gold was up 3.3% at $1,643.85 an ounce, having gained more than 1% in the previous session. U.S. gold futures firmed 3.1% to $1,644.10.

The move was the first such cut since the financial crisis. It comes amid a volatile patch on Wall Street and amid a steady stream of pressure from President Donald Trump, who has called for lower rates to stay competitive with policy at other global central banks.

“The coronavirus poses evolving risks to economic activity,” the Fed said in a statement. “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”

The dollar index held close to the previous session’s one-and-a-half-month low against a basket of currencies.

Investors are now focused on a G7 conference call on Tuesday, in which finance ministers and central bank governors will discuss ways to bolster their economies in the face of the spreading coronavirus outbreak.

Bank of England Governor Mark Carney said global policymakers are working on a “powerful and timely” response to allay fears of a new global recession.

“Global economic conditions were fragile entering into 2020 and any hopes of them recovering in light of the expected dilution in trade tensions were snuffed out because of this coronavirus outbreak,” FXTM’s Tan said.

Gold prices slumped more than 4.5% on Friday amid a broader market sell-off but have recovered since.

“I think we have done enough on the downside (in gold) for the time being and with much talk of rate cuts/stimulus in the offing, the next move should be upwards,” said David Govett, head of precious metals at Marex Spectron.

“However, this does depend on the scale of the support offered by central banks.”

Lower interest rates reduce the opportunity cost of holding non-yielding bullion and also weigh on U.S. yields and the dollar, in which gold is priced.

Meanwhile, global equities also rose on expectations of central bank stimulus.