Gold has closed at a three-month high as some investors reduce bets on weaker prices after Federal Reserve chief Janet Yellen's Congressional testimony pointed to continuity in monetary policy.
The most actively traded gold futures contract, for April delivery, on Tuesday rose $US15.10, or 1.2 per cent, to settle at $US1,289.80 a troy ounce on the Comex division of the New York Mercantile Exchange. This was gold's highest close since November 7, when futures ended at $US1,308.50 an ounce.
Yellen said the Fed would continue on its present course of measured reduction in bond purchases. She said that while stimulus reductions aren't on a preset course, the US economic outlook would need to worsen considerably before the central bank considers halting the cuts to stimulus.
Gold prices had tumbled 28 per cent last year in anticipation that the Federal Reserve would begin winding down its accommodative measures. Current gold prices largely reflect the expectation that the central bank will continue to reduce its stimulus, traders said.
Still, some investors had bet gold prices would fall further if Yellen "said something super hawkish" during her first Congressional testimony. Bart Melek, a senior commodity strategist with TD Securities, said that gold prices drew strength after Yellen's remarks didn't cover new ground, prompting these investors to close out those wagers.
Traders who bet on weaker prices take the sell-side side of a futures contract and must repurchase those positions, or buy gold, in order to close out their position.
Meanwhile, Yellen's comments regarding recent employment and the overall health of the labour market reassured bullish gold traders that the central bank could be more accommodative in the future, said Adam Klopfenstein, a senior markets strategist with Archer Financial Services.
Yellen said that recent weakness in US labour market data could be linked to harsh winter weather and hasn't prompted a policy shift at the central bank, but there are concerns that recent declines in the unemployment rate weren't reflective of an improving labour market.
"She's saying that they don't have enough data to change the course of policy, and the market is betting that will change," Klopfenstein said.
The central bank had several options to boost the labour market, from halting stimulus reductions to delaying increases in benchmark interest rates, Klopfenstein said. Either policy would bolster gold's allure, as the zero-yielding asset more easily competes with interest-bearing investments like Treasury bonds when interest rates are low.
Gold had rocketed to record highs near $US1,900 an ounce on the back of the Fed's successive rounds of stimulus, as worries that the accommodative measures would raise inflation or weaken the US dollar sparked an investor rush to store of value assets like gold.
