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TheStreet Open House

Massive Gold Spike Fueled by Fed Sentiment, Says World Gold Council

NEW YORK (TheStreet) -- The World Gold Council said gold's biggest gain in 2014, which occurred a week ago,  was sparked by central banks and other financial institutions making large bets based on statements by the Federal Reserve suggesting it will maintain the key interest rate lower than previously expected.

Gold futures for August delivery popped 3.3%, or $41.40 an ounce, on June19, making it the largest intraday gain this year. The surge came a day after the Fed released a statement of economic projections coupled with Chairman Janet Yellen's pronouncement that the central bank intends to keep the federal funds rate near historically low levels for a "significant" time even after its economic stimulus program is concluded.

The sharp rise in gold futures came amid central bank purchases, institutional buying and massive short covering, World Gold Council managing director of investment strategy Marcus Grubb told reporters on Wednesday in New York. Grubb called the latest Fed policy-making meeting a "very important event" for gold.

Grubb's comments that this buying was based on the Fed's actions and not on geopolitical events -- such as the escalation of violence in Iraq -- support the view that the gain was due to a fundamental change in market sentiment. Gold prices haven't gained or lost more than 0.3% in the five trading days following the Jun 19 surge.

Some analysts argue that below metal's value is unlikely to rise much higher in the short term.

"A re-basing of expectations post Fed conference, which had near-term tones of hawkishness and further-out tones of dovishness, did not warrant gold's $50 surge," UBS analysts Edel Tully and Joni Teves wrote June 20 in a note to clients. "Instead the move has a lot more to do with positioning."

UBS wrote that short positions were high and long positions were too low -- just one million ounces above the 2014 low.

Grubb said he wasn't predicting that gold prices will continue to move higher, but he also said there now was little likelihood that gold will post a similar tumble in the near term.

Gold for August delivery at the COMEX division of the New York Mercantile Exchange on Wednesday settled up $1.30 to $1,322.60 an ounce.

-- Written by Joe Deaux in New York.

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