Gold goes on fresh rampage as Yellen doubles down on dovishness

Gold rebounded from one-month lows Tuesday after Federal Reserve chief Janet Yellen pulled off the unthinkable: issuing an even more dovish speech to the Economic Club of New York than her comments after the Feds March meeting.

Earlier Tuesday, an S&P/Case-Shiller housing-price index got the ball rolling for gold by posting a 5.4% increase for the 12 months ended in January. Why was gold affected? Because rising home prices are the latest indicator that inflation is surfacing in the U.S., and gold is a traditional inflation hedge.

Then Yellen began her speech, and it appears that even the Fed chief herself doesnt know when the next interest-rate hike could be coming. Only gradual increases in the federal funds rate are likely to be warranted in coming years due to economic uncertainties, she said.

Proceed cautiously, Yellen says: Her dovish message flew in the face of recent hawkish comments by several Fed presidents urging more tightening this year.

I consider it appropriate for the committee to proceed cautiously in adjusting policy, Yellen said, citing risks from global developments. This caution is especially warranted because, with the federal funds rate so low, the FOMCs ability to use conventional monetary policy to respond to economic disturbances is asymmetric.

Although Yellen didnt discuss negative interest rates as a potential policy tool, she hinted that more quantitative easing might be on the table if necessary, saying the Fed could increase the size or duration of our holdings of long-term securities.

While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed, she said.

Yellen unsure if inflation has legs: One of those risks is inflation, and on that subject Yellen was vague in commenting on the recent uptick in the core Consumer Price Index. It is too early to tell if this recent faster pace will prove durable, Yellen said.

Yellen has doubled down on the dovishness from the March statement and press conference, Neil Dutta of Renaissance Macro Research told Bloomberg. Global economic developments are cited very prominently.

As a result, gold soared 1.4% to hit $1,238, up from Mondays one-month low near $1,208. In late-afternoon trading the price had topped $1,240. Meanwhile, silver was up 0.7% at $15.326 and moving higher in after-hours trading.

“It looks like we may be pricing back in just one interest rate hike. That’s why we’re rallying,” Phillip Streible of R.J. O’Brien told Reuters, while Warwick Valley Financial Advisors President Ken Ford told MarketWatch, From a longer-term-trend perspective, gold may have turned the corner.

Time will tell whether gold can maintain Tuesdays advance, but with the central bank already crawfishing on its rate-hike pace, the odds are with the yellow metal.