PRECIOUS-Gold down 1 pct on U.S. Fed policy and budget cuts

Wed Feb 27, 2013 3:00pm EST

* U.S. equities gain weighs on gold's safe-haven status
    * Deep U.S. spending cuts raise deflation worries
    * Coming up: U.S. GDP data, PCE Price Index Thursday

 (Updates throughout, changes byline, dateline, pvs LONDON)
    By Frank Tang
    NEW YORK, Feb 27 (Reuters) - Gold fell 1 percent on
Wednesday, nearly erasing all of the previous session's gains,
hit by disappointment over a lack of new Federal Reserve
stimulus and deflation worries over across-the-board deep U.S.
spending cuts.
    A rally in U.S. equities also weighed on gold's safe-haven
appeal, as bullion snapped a four-session winning streak a day
after Fed Chairman Ben Bernanke defended the central bank's
bond-buying stimulus policy. 
    On Wednesday, Bernanke said the U.S. jobless rate is
unlikely to reach more normal levels for several years, but
there were few surprises in his second day of testimony to  the
Congress. 
    Frank McGhee, head precious metals trader of Integrated
Brokerage Services LLC, said that the central bank's policy of
bond buying known as quantative easing "is becoming less and
less effective as Bernanke announced nothing new."
    That brings the deflationary aspect of budget cuts known as
sequestration back to the forefront, McGee said.
    It is unlikely that Congress will act to stop the $85
billion in across-the-board cuts due to start Friday. The cuts, 
mandated by a 2011 deficit reduction law, dent gold's
inflation-hedge appeal. 
    Spot gold was down 1.1 percent to $1,595.71 an ounce
by 2:08 p.m. EST (1908 GMT), off a 1-1/2-week high of $1,619.66
set on Tuesday. 
    U.S. gold futures for April delivery were down $19.80
to $1,595.70, with trading volume in line with their 250-day
average, preliminary Reuters data showed.
    On Tuesday, Bernanke said inflation remained subdued and the
potential risks of loose monetary policy did not seem material
now. His remarks had eased fears the Fed would end its massive
bond-buying earlier than thought. 
    Three rounds of quantative easing have helped gold to a
record-breaking rally in the past few years, but signs of U.S.
economic recovery have weighed heavily on the metal this year.
    
    INVESTMENT BUYING UNDER PRESSURE
    As a gauge of investor interest, holdings of the SPDR Gold
Trust, the world's top gold-backed exchange-traded fund,
fell around 2.5 tonnes from the previous session to 1,270.44
tonnes on Feb. 26, in its sixth session of decline.
    The sell-off in exchange-traded funds (ETFs) since the start
of the year is mostly due to a perceived improvement in the
global economic outlook and concerns on the longevity of the
Fed's quantitative easing, analysts said.
    Among other precious metals, silver was down 1.4
percent to $28.94. Spot platinum dropped 1.5 percent to
$1,593.50, while palladium was down 0.4 percent to
$740.47. 
 2:08 PM EST     LAST/    NET   PCT      LOW    HIGH  CURRENT
                SETTLE   CHNG  CHNG                       VOL
 US Gold APR   1595.70 -19.80  -1.2  1592.60 1614.40  150,628
 US Silver MAR  28.943 -0.317  -1.1   28.835  29.390   23,913
 US Plat APR   1600.10 -16.40  -1.0  1592.00 1625.80   10,586
 US Pall MAR    743.15   3.75   0.5   734.80  749.45    2,577
                                                               
 Gold          1595.71 -17.40  -1.1  1594.25 1614.51         
 Silver         28.940 -0.420  -1.4   28.900  29.410
 Platinum      1593.50 -24.99  -1.5  1595.00 1623.00
 Palladium      740.47  -3.25  -0.4   737.50  747.97
                                                               
 TOTAL MARKET              VOLUME          30-D ATM VOLATILITY
                CURRENT   30D AVG  250D AVG   CURRENT     CHG
 US Gold        171,570   197,514   176,590     14.83   -0.68
 US Silver       76,484    59,999    52,958     23.24   -1.16
 US Platinum     11,281    13,797    10,885     18.55   -0.90
 US Palladium     7,892     8,266     5,165                  
                                                               
   

 (Additional reporting By Clare Denina in London; Editing by
Grant McCool)