Gold Drops as Investors Try to Make Sense of ‘an Unclear Fed’

(Bloomberg) -- Gold fell for a second day, while sustaining its hold above $1,400 an ounce, after the Federal Reserve signaled it probably won't embark on a lengthy easing cycle following the first U.S. rate cut since the financial crisis.

On Wednesday, the bank pared the target range for the benchmark rate by a quarter point, a move that was widely expected. Still, markets were whipsawed on remarks from Fed Chairman Jerome Powell, who struggled to define the path ahead. Two Fed rate-setters dissented.

“The Fed poured cold water on the market and we are seeing a reversal in most asset classes, gold included,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “Overall, it appears that the Fed is not entirely sure of its future policies in the near-term,” he said, adding: “An unclear Fed means confused markets, and I expect volatility to be high in the near term.”

Gold is facing a setback after rallying in recent months to a six-year high as central banks globally signaled that looser monetary policy is needed to boost growth. Powell said the quarter-point reduction amounted to a “mid-term policy adjustment,” fueling speculation the central bank is not necessarily at the start of an easing cycle, but he also said the Fed hasn't ruled out further cuts. A gauge of the dollar rose to the highest in two months.

“Gold had become somewhat overbought in the short term and was due a correction,” said Mark O'Byrne, research director at GoldCore, adding that he sees gold falling as low as $1,350. Still, “given the uncertain political and economic backdrop and growing demand globally, we expect this selloff to be short and relatively shallow.”

The implied rate on January fed funds futures, an indication of where the market sees the central bank's key rate at year-end, rose to 1.77%, from 1.72% before the Fed decision. That's less than the Fed's decision Wednesday to lower the target range for the benchmark rate to 2%-2.25%.

Data from the 1980s to date show that once the market prices in lower borrowing costs within 30 days of a Fed decision, “the market has its way more often than not — suggesting that gold could still remain supported,” TD analysts including Bart Melek said in a note to clients Thursday.

Gold futures for December delivery declined 1.3% to $1,419.70 an ounce at 10:16 a.m. on the Comex in New York. In July, the precious metal hit $1,454.40, the highest intraday since May 2013. Silver futures dropped 2% to $16.075 an ounce, while platinum and palladium also fell.

While the initial gold market reaction may be to sell off early this month, the outcome is “largely neutral” for the precious metal at current levels, Citigroup Inc. said in a note. The bank maintained its third-quarter average price forecast of $1,425 and its zero-to-three month point-price target of $1,450.

Investors will now seek further clarity from the Fed, as they weigh fresh government data showing U.S. manufacturing activity deteriorated in July to an almost three-year low alongside rising jobless claims.

--With assistance from Justina Vasquez.

To contact the reporters on this story: Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net;Rupert Rowling in London at rrowling@bloomberg.net

To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Steven Frank, Luzi Ann Javier

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