Gold futures surge as Fed warns of deflation

Gold futures soared to new heights above $1,290 an ounce on Wednesday after the U.S. Federal Reserve signaled it may take further quantitative-easing measures to support the recovery and stave off deflation.
The U.S. dollar, meanwhile, came under heavy selling pressure against its major rivals in the wake of the Fed’s latest policy announcement.
Gold for December delivery /quotes/comstock/21e!f:gc\z10 (GCZ10 1,291, +16.30, +1.28%) hit an intraday high of $1,296.50 an ounce in electronic trading on Globex.
The contract recently gained $19, or 1.5%, to $1,293.30 an ounce.
“A new day, a new record high – that essentially describes the situation on the gold market at the moment,” Commerzbank said in a note to clients.
During the regular trading session Tuesday, December gold futures finished lower, marking their first down day in four. Gold on Monday had hit a fresh record, settling at $1,280.80 an ounce. See Tuesday’s Metals Stocks column.

Fed worried, but defers action

The Fed hinted that it's becoming uneasy about the economy, but deferred taking any new steps to boost the recovery amidst intense internal debate. Phil Izzo and JPMorgan's Bruce Kasman discuss. Also, Julian Barnes discusses Democrats' failed Senate effort to reverse the 'Don't Ask, Don't Tell' policy for gays in the military.

After regular trading closed, the Fed signalled it would be willing to take additional steps to boost the faltering U.S. economic recovery and to ward off deflation.
The central bank’s words have largely been interpreted to mean that it will likely take further quantitative-easing measures late this year.
Gold prices rallied in the aftermath of the Fed statement, while the dollar fell sharply.
Gold and the dollar have a strong inverse relationship; when the dollar falls, gold tends to gain.
The dollar index /quotes/comstock/11j!i:dxy0 (DXY 79.73, -0.71, -0.88%)  , which tracks the performance of the greenback against a basket of other major currencies, fell 0.8% to 79.790. The euro surged 0.8% to $1.3372.
BNP Paribas on Wednesday raised its estimates for gold prices, citing the higher probability of quantitative easing in the U.S. and the weaker-than-expected dollar. The bank now expects gold prices to average $1,200 an ounce in 2010 and $1,290 an ounce in 2011.
“The increase in the price should continue to be driven by safe-haven demand, motivated by sovereign risk and economic uncertainty,” BNP’s Anne-Laure Tremblay wrote in a research report.
“The increasing prospect for quantitative easing is supportive of gold prices on two fronts: ample liquidity tends to be supportive of asset prices and the move is raising fears of high inflation in the longer term," Tremblay said.