Gold posts biggest advance in three months as Fed drives whipsaw

[NEW YORK] Gold posted its biggest gain since January as bets on the outlook for US interest rates drove increased volatility for the metal. Silver climbed the most this year.

With the Federal Reserve meeting this week, bullion investors have been parsing economic data for clues on when rates will rise. Bullion on Friday posted its biggest tumble since early March, and its 30-day historical volatility is the highest in seven weeks.

Traders are getting whipsawed with a sputtering American economy driving expectations that the Fed will wait longer before raising rates. That view has bond traders worried about inflation again and means that the dollar is losing some of its luster. Lower rates help to boost the appeal of gold, which generally offers returns only when prices rise. The metal is also a traditional hedge against higher consumer costs and an alternative to the US currency.

"It's definitely a very live market right now," Howard Wen, a precious-metals analyst at HSBC Bank USA, said in a telephone interview. "The combination of the Fed meeting and these economic indicators creates an environment for more volatile gold prices." Gold futures for June delivery jumped 2.4 per cent to settle at US$1,203.20 an ounce at 1:50 pm on the Comex in New York, the biggest gain since Jan. 15.

The advance on Monday comes after a 2.3 per cent decline for prices last week. The Chicago Board Options Exchange Gold ETF Volatility Index, derived from options prices on the SPDR Gold Trust, climbed for four straight sessions, the longest streak since January.

The Fed starts a two-day meeting on Tuesday, after reports last week showed orders for business equipment unexpectedly fell and purchases of new homes slumped more than forecast in March. Higher rates spur investors to favor assets with better yield prospects such as equities and bonds.

Prices extended gains Monday after the electronic auction that replaced the London fixing ritual showed that there was "substantial demand exceeding supply," said Tai Wong, the director of commodity products trading at BMO Capital Markets Corp in New York.

Gold also rose after China's industrial profits declined in March, bolstering the case for the Asian nation to add more economic stimulus. Prices climbed 70 percent from December 2008 to June 2011 as central banks increased money supply on an unprecedented scale, spurring concerns that inflation would accelerate.

The recent US economic data suggests that the Fed could push "the first tightening out to 2016," Bart Melek, the head of commodity strategy at TD Securities in Toronto, said in a telephone interview. "And overnight, we did get some sort of signaling from the government of China that they may do something unconventional on the monetary front."

The Bloomberg ECO Surprise Index fell to the lowest since 2009 last week. Holdings in bullion-backed exchange-traded products increased for the sixth day, to 1,626.2 tons, the longest run since the end of January, according to data compiled by Bloomberg as of April 24.

Silver futures for July delivery jumped 4.8 percent to $16.439 an ounce on the Comex, the largest advance since Dec. 9. On the New York Mercantile Exchange, platinum surged the most since September 2013, and palladium rose.

BLOOMBERG