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Gold surges to 5-year high after Fed opens door for rate cut

CNBC logo CNBC 6/19/2019 Eustance Huang

Gold prices spiked in the afternoon of Asian trading hours on Thursday after a dovish U.S Federal Reserve opened the door to further rate cuts.

Spot gold prices surged to their highest level since March 2014, Reuters reported. As of 12:42 am ET Thursday, it was 1.33% higher at around $1,378.01 per ounce.

Gold futures also saw strong gains to $1,382.10 per ounce. They had earlier soared 3% to $1,397.70 per ounce, according to Reuters.

Following the Fed meeting on Wednesday, where the U.S. central bank left interest rates unchanged but opened the door for a possible rate cut in the future, the 10-year Treasury yield also slipped below 2% for the first time since November 2016 — breaching an important psychological level.

The benchmark note last traded at 1.9872%, as of 12:40 a.m. Thursday ET.

One economist told CNBC that the surge in gold prices were likely driven by the declines in yields of shorter-duration Treasurys ranging between three months and two years. The yield on the 3-month Treasury note trickled lower to 2.175%, as of 7:30 p.m. ET Wednesday. The 2-year note dropped 2.01% to about 1.731%, as of 12:40 a.m. ET Thursday.

With expectations for the U.S. Federal Reserve's funds rate to drop by 2020, gold has become "quite attractive" as a result, said Rob Carnell, chief economist and head of research for Asia Pacific at ING.

The shorter end of the yield curve tends to move in line with interest rate movements, meaning that a lower expected Fed funds rate will likely drive short term yields down. As the yields on the shorter-duration notes go down, gold becomes more attractive as an investment option due to its relatively higher yield.

Fed Chair Jerome Powell said at a post meeting news conference that "many participants now see the case for somewhat more accommodative policy has strengthened."

The Fed's rate projections showed that eight Fed members see a cut this year, which traders took as a further sign the central bank was close to cutting rates. Its median forecast, however, still reflected no cuts this year, but additional easing in 2020. Nine members on the Federal Open Market Committee wanted a cut to a funds rate around 2.1% in 2020.

Han Tan, market analyst at forex brokerage FXTM, attributed the gold price spike to a weakening dollar on the back of the dovish Fed statement as well.

"The Dollar's weakness that followed the Fed's dovish pivot has sparked the surge in Gold prices, given the gloomier outlook over the global economy. With major central banks such as the Fed and the ECB citing greater uncertainties, such dovish tones from policymakers are roaring on Bullion bulls," he wrote in a note.

— CNBC's Jeff Cox and Fred Imbert contributed to this report.

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