PRECIOUS-Gold gains as investors bet on continued Fed stimulus

Mon Oct 28, 2013 2:23pm EDT

* Dollar index steadies ahead of Fed meeting

* Gains seen likely if Fed delays stimulus tapering

* Platinum up 1.7 pct on South African strike (Updates prices)

By Marina Lopes and Clara Denina

NEW YORK/LONDON, Oct 28 (Reuters) - Gold reached fresh five-week highs on Monday on growing confidence the U.S. Federal Reserve would stick with its bullion-friendly stimulus at a policy meeting later this week.

The Federal Reserve starts its two-day meeting on Tuesday and is widely expected to keep its bond-buying stimulus unchanged at $85 billion per month. Most expect the central bank to delay withdrawing stimulus until March 2014.

Spot gold was up $1.76, or 0.13 percent, at $1,354.04 an ounce by 2:08 p.m. EDT (1808 GMT). The metal hit an intraday high of $1,361.60, its highest since Sept. 20.

U.S. gold futures for December delivery settled up 30 cents an ounce, or 0.01 percent, at $1,352.20.

Adding to gold's appeal for investors betting on the Fed's continued stimulus spending are expectations that the U.S. government shutdown will hurt macroeconomic data for October.

"October data is going to be a lot weaker than expected, so because of that gold prices are continuing to rise," said Phillip Streible, senior commodities broker at RJ O'Brien in Chicago.

Prices could test the psychologically key $1,400 per ounce mark if the Fed leaves its bond buying program in place this week, Streible said.

Data released early Monday showed U.S. manufacturing output barely rose in September and contracts to buy previously owned homes dropped to their lowest figure in nearly 3-1/2 years, reinforcing expectations that the Fed's stimulus will continue into next year.

Bullion has fallen nearly 20 percent this year as investors dumped gold holdings for better-performing equities and on fears that the end of easy money from the U.S. central bank would dim the metal's inflation-hedge appeal.

In the past two weeks, however, gold has gained about 6 percent as weak U.S. data and budget battles in Washington looked set to deter the Fed from scaling back asset purchases. Bullion is on track to rise 2 percent this month.

"What we're seeing now is a subtle shift in underlying technical and psychological sentiment for this market," said Adam Sarhan, chief executive of Sarhan Capital.

The dollar steadied above a nine-month low against a basket of currencies, while U.S. Treasury yields edged higher, although well below a peak of 3.0 percent at the beginning of September, when markets still believed the Fed was about to change its policy.

Returns from U.S. bonds are closely watched by the gold market given that the metal pays no interest.

FUNDS CUT BULLISH BETS

A gauge of investor sentiment, holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Shares , fell 4.5 tonnes to 872.02 tonnes on Friday.

Hedge funds and money managers cut bullish bets in futures and options of U.S. gold markets for the week to Oct. 1, a report by the Commodity Futures Trading Commission showed.

Traders were also monitoring physical demand in Asia, where demand has been subdued following a big rush earlier this year. Premiums in India jumped to a record of $130 an ounce last week as government restrictions on gold imports squeezed supply during the peak holiday season.

India, where gold is considered auspicious and is bought during weddings and festivals, celebrates Diwali and Dhanteras festivals in early November.

"There is little chance we shall see a pronounced buying revival given time constraints before the festival of light marks an end to the traditional pre-holiday bullion purchases by jewellers in the top consumer country," VTB Capital said.

In China, premiums on the Shanghai Gold Exchange fell into negative territory. Premiums were as high as $30 in April and May.

Spot silver rose $0.02, or 0.09 percent, to $22.50 an ounce and was on track to rise 4 percent this month.

Spot platinum was up $24.59, or 1.7 percent, at $1,469.49 an ounce on prospects strikes in South Africa could curb supply. It has risen 4.9 percent this month.

Spot palladium was up $3.78, or 0.51 percent, at $743.75 an ounce and is on track to rise 0.33 percent this month. (Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Holmes, David Evans, Josephine Mason, Krista Hughes and Nick Zieminski)