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Gold prices surge on rotation into 'safety of gold, silver and bonds'

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(Kitco News) - Gold futures rose sharply Thursday as equities sank with markets focused on longer-term worries about the economy after a two-day meeting of the Federal Open Market Committee officials that ended Wednesday.

“We’re seeing a sector rotation out of risk assets like U.S. equities and into the safety of gold, silver and bonds,” said Phillip Streible, chief market strategist with Blue Line Futures.

Around 11:30 a.m. EDT, the Dow Jones Industrial Average was down by around 1,106 points as the market gave up some of the steep recovery that had occurred after this spring’s sell-off that was due to economic fallout from the COVID-19 pandemic.

Meanwhile, Comex August gold was $31.40 higher to $1,752.10 an ounce, and July silver was 36.9 cents higher at $18.165. Treasury yields – which move inversely to the price – were lower for the day.

“It’s the fact that yesterday the Fed painted the reality of the situation as a bleak picture right now,” said Bob Haberkorn, senior commodities broker with RJO Futures.

Policymakers indicated that that the economy was weak enough that they expect interest rates to remain at or near 0% through 2022 and reiterated the mantra that they will do whatever it takes to beef up the economy again. The Fed’s forecasts called for gross domestic product to decline by 6.5% in 2020 before bouncing 5% next year. Fed Chair Jerome Powell said “we’re not even thinking” about raising rates but instead focusing on underpinning a weak economy.

“There is a flight-to-safety trade going into gold and silver this morning,” Haberkorn said. “This whole equity run [sharply higher in recent weeks] has been kind of a head-scratcher at how fast and quick it got here.”

Streible suggested equity-market valuations after the recent rally “had become disproportionate to where reality was most likely at” in the economy itself.

A few-hundred point move either way in the Dow might not have prompted a huge move in gold, he continued. But when the decline for the day became 1,000 points, investors became more unsettled and saw the move as a “reality check.”

Streible also pointed out that while the Fed remained accommodative, there was no new policy action. “So maybe the market was looking for more,” he said.

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