Gold price rallies after Fed holds rates steady

Gold jumped on Thursday after the US Federal Reserve announced that interest rates in the world’s largest economy would not be raised from the near zero levels where it’s been for the past nine years.

Gold for delivery in December – the most active futures contract on the Comex market in New York – jumped more than $10 an ounce to $1,131.76, a more than two-week high.

The dovish statement from the US central bank mentioned subdued inflation in the US – yesterday CPI in fact moved into deflationary territory – and the “moderate pace” of economic expansion.

The Federal Open Market Committee also only expects inflation to reach its target rate of 2% only by 2018.

The FOMC also said it “continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.”

Gold and interest rates have a strong negative correlation.

Rising real interest rates increases the opportunity costs of holding gold because the metal provides no yield and therefore the price should decline.

Higher rates also boost the value of the dollar, which usually move in the opposite direction of the gold price.

Since the global financial crisis the relationship between interest rate expectations and the gold price has only become tighter with some analysts believing the metal can serve as an early warning system of both the direction and magnitude of the move in rates.

Gold price reaction to Federal Reserve interest rate decision

Gold price reaction to Federal Reserve interest rate decision

Image of eagle over the entrance to the headquarters of the Federal Reserve in Washington, DC by Tim Evanson