PRECIOUS-Gold drops as market waits for Fed's rate view

Tue Jul 29, 2014 5:36pm EDT

* Fed statement on Wednesday key to gold's next move

* Geopolitical tensions provide floor to gold (Adds action in U.S. session and trader's comment; adds NEW YORK to dateline, new byline)

By Barani Krishnan and Jan Harvey

NEW YORK/LONDON, July 29 (Reuters) - Gold fell on Tuesday as investors nervously awaited the end of U.S. Federal Reserve's two-day policy meeting on Wednesday to see if the central bank will raise interest rates faster than expected.

Further weighing on the market was some selling in the August U.S. gold futures contract, traders said, as the contract headed for expiration over the next few weeks.

"What really mattered of course was what people were thinking would happen at the FOMC," said George Gero, a senior gold analyst at RBC Capital Markets in New York, referring to the meeting of the Fed's Federal Open Market Committee.

The FOMC will issue a statement on Wednesday that will be studied closely for clues on when the central bank is likely to start raising rates.

Gold is highly sensitive to any changes in U.S. monetary policy. It rallied to record highs in the wake of the financial crisis after the Fed slashed rates and opted for extraordinary stimulus measures.

Last Thursday, bullion hit a five-week low below $1,300 an ounce on speculation that U.S. job gains so far this year could accelerate the need for higher interest rates. Fed Chair Janet Yellen said earlier this month the central bank might raise rates sooner than expected if labor growth remained robust.

U.S. second-quarter GDP data, due on Wednesday, and July employment numbers due on Friday are other indicators the market will be watching.

Traders and investors will also closely scrutinize Wednesday's FOMC statement for any change in the Fed's stimulus rollback. The central bank has typically cut $10 billion from its monthly bond buying program at each recent policy meeting.

At 4:30 p.m. EDT (2030 GMT), the spot price of gold was down 0.4 percent at $1,299.10 an ounce after rising to as high as $1,312.10 earlier in the day.

The most-active U.S. gold futures contract also settled down 0.4 percent at $1,298.30.

Geopolitical tensions have prevented gold from falling too far in recent sessions, however, as some investors have taken to it for its safe-haven quality.

In the latest clashes between Ukrainian troops and pro-Russian rebels, dozens of people were killed in eastern Ukraine. Meanwhile, Israel knocked out Gaza's only power plant, flattened the home of its Islamist political leader and pounded dozens of other high-profile targets.

In the physical bullion market, demand was subdued as buyers awaited a possible price drop. Asia's major gold consumers have bought less this year compared with 2013, data showed.

In other precious metals, silver slipped 0.1 percent to $20.55 an ounce. Platinum fell 0.5 percent to $1,472.50. Palladium was also lost 0.5 percent to $875.20. (Additional reporting by A. Ananthalaskshmi in Singapore; Editing by Jane Baird, Susan Fenton, Dale Hudson and Peter Galloway)

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