By Geoffrey Smith
Investing.com -- Gold prices surged on Tuesday in response to a surprise half-point cut to the Federal Reserve’s key interest rate - and expectations that the Fed will be unable to resist political pressure to cut further as the coronavirus spreads across the U.S.
By 11:30 AM ET (1630 GMT), gold futures for delivery on the Comex exchange were up 2.6% at $1,636.00 a troy ounce, within 3.5% of the seven-year high that they hit in February as the Covid-19 virus started to disrupt public life in Europe. Spot gold was up 2.8% at $1,635.65.
Silver futures rose 2.7% to $17.19 an ounce while platinum futures rose 1.1% to $868.80. Copper futures, a rough proxy for expected industrial activity, fell 1.4% to $2.56 a pound.
Earlier, the Fed cut the target range for fed fund by a full 50 basis points to 1%-1.25%, citing the “evolving risks” of the coronavirus to the U.S. economy.
“What matters for us is not the epidemiology, but the risk to the economy,” Federal Reserve Chairman Jerome Powell told a press conference. “We saw a risk to the economy, so we decided to act.”
He repeated that the U.S. economy is “strong”. but acknowledged that a rate cut was no silver bullet that would fix global supply chains. He admitted that “we don’t have all the answers” but did say the cut would “provide a substantial boost to the economy.”
The cut was immediately followed by a tweet from President Donald Trump calling on the Fed to do more.
“It is finally time for the Federal Reserve to LEAD. More easing and cutting!” Trump demanded.
Trump had earlier dismissed the virus as a Democratic Party "hoax" and said as recently as Thursday that "It's going to disappear. One day it's like a miracle, it will disappear."
Elsewhere, Treasury Secretary Steven Mnuchin said the Fed’s move was “non-political”.
All in all, the events strengthened gold investors’ expectations of a race to the bottom among global central banks as they expend a shrinking pile of monetary policy ammunition on fighting the outbreak.
Overnight, the Reserve Bank of Australia and the central bank of Malaysia had already cut their respective key rates by 25 basis points each. The Bank of Canada is also widely expected to cut its key rate when it meets on Wednesday.
The Fed’s move had little initial impact on equity markets which had already priced it in, but outflows from equities resumed after Powell's press conference ended.
In the meantime, bond yields, which had already priced in the move, started to price in further easing. By the end of Powell’s press conference, the United States 2-Year Treasury note yielded 0.77%, its lowest since 2016 and a drop of 9 basis points on the day. The 10-Year benchmark fell 3 basis points to 1.06%, ever closer to its first quote below 1%.