September 13, 2012 / 12:12 PM / 5 years ago

Gold jumps 2 percent as Fed stimulus stirs inflation fears

3 Min Read

Gold bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011.Lisi Niesner

NEW YORK (Reuters) - Gold surged 2 percent to $1,770 an ounce on Thursday, scaling a six-month high, after the Federal Reserve launched another aggressive stimulus program.

The metal received a strong boost after the U.S. central bank said it would buy $40 billion of mortgage-backed debt each month until the jobs outlook improved substantially, as long as inflation remained contained.

Market watchers said the Fed was essentially shifting its focus to employment from price stability.

"They are emphasizing the growth mandate, and that means they don't care about inflation other than giving lip service to it," said Axel Merk, chief investment officer at Merk Funds, which has $600 million in currency mutual-fund assets.

"The price of gold will do very well in the years to come," Merk said.

Spot gold jumped 2 percent to $1,766.40 an ounce as of 1:58 p.m. EDT after hitting a high of $1,772.11, within striking distance of a 2012 high of $1,790, set on February 29.

U.S. gold futures for December delivery settled up $38.40 at $1,772.10 an ounce in very heavy volume.

The gold option order flow indicated that bullion could rally further as investors scrambled to buy back their previously bearish bets after the Fed announcement, said COMEX gold option floor trader Jonathan Jossen.

Silver, which tends to be more speculative and volatile than gold, rallied 4 percent to $34.59 an ounce.

The Fed said the new round of bond-buying was open ended and that it would not likely raise interest rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014.

"The Fed's inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market," said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, which has more than $40 billion in assets.

Qe Efficacy in Question

Year-to-date, gold is up 13 percent following a 10 percent rally since the start of August as central banks around the world appeared more determined to take up further stimulus to aid a frail global economy.

That is still below the 15 percent gain seen early this year after the Fed said in January that it would keep interest rates near zero through late 2014. Doubts about additional quantitative easing (QE), or printing money to buy government bonds, had decreased bullion's appeal as an inflation hedge.

However, doubts remain about the likely efficacy of such a move. Reuters data show that asset performance tended to diminish with each new round of QE, and it sometimes takes as long as a year for the effects of Fed action to kick in. (Asset reaction to QE: link.reuters.com/pym62t)

Among other precious metals, spot platinum rose 2.6 percent to $1,678.24 an ounce, while spot palladium climbed 2.1 percent to $685.22.

Additional reporting by Veronica Brown and Amanda Cooper in London, and Rujun Shen in Singapore; Editing by Dale Hudson

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