Gold ends lower on oil losses as Fed holds rates

NEW YORK/LONDON (Reuters) - Gold ended lower on weaker crude oil Wednesday, but off its session lows as the dollar extended losses after the Federal Reserve held rates unchanged and did not signal a rate hike would be imminent.

The Fed held key U.S. interest rates steady at 2.0 percent, and said that it expected inflation to moderate later this year and next year, but the uncertainty about the inflation outlook remained high due to rising energy and commodities.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the Fed said in a statement following a two-day policy meeting.

Gold XAU= was at $885.90/887.90 an ounce by New York's last quote at 2:45 p.m. EDT, down from $888.70/889.70 an ounce late in New York on Tuesday.

"I don't think it (the Fed) was aggressive enough to significantly alter the perception that existed prior to the statement's release," said Bill O'Neill, managing partner of LOGIC Advisors in Upper Saddle River, New Jersey.

"I think the Fed will still be reluctant to raise rates because of the existing concern surrounding the financial and liquidity crisis," O'Neill said.

The U.S. gold contract for August delivery on COMEX division of New York Mercantile Exchange settled down $9.30, or 1 percent, at $882.30 an ounce.

However, in after-hours electronic trade after the Fed's announcement, August futures narrowed gains to trade down $3.30 at $888.30 an ounce.

OIL ENDS OFF LOWS

Prior to the Fed announcement, oil -- a key external driver of gold -- dropped to below $132 a barrel after U.S. weekly data showed U.S. crude inventory increased. U.S. crude futures ended down $2.45 at $134.55 a barrel

"I think the drop in oil is the most likely scenario for the drop in gold, but it is wedged in a pretty tight range," said analyst Michael Jansen of JP Morgan.

Gold moves in the opposite direction of the dollar as it is often bought as an alternative investment to the U.S. currency. Dollar-priced gold also becomes cheaper for holders of other currencies as the greenback softens.

"If people are ruling out any early increases in interest rates, then you could see this as slightly negative for the dollar, which would be positive for gold," said Daniel Smith, an analyst at Standard Chartered.

The precious metal has benefited this week from a dip in prices, which are down around $30 from a month ago.

A $25 price slide on Monday was met by good buying from jewelers and institutional investors, with inflows into New York's largest ETF rising 2 percent that day.

"Jewelry demand, although low, is reported to pick up when prices fall to $880 an ounce, indicating a level of support," said Fairfax analyst John Meyer.

In supply news, an industry body said it expected Russian gold output to rise by 5.2 percent in the first five months of 2008 to 41.834 tonnes.

Russia is the world's fifth largest supplier of mined gold and its mine production has been falling for the last five years, but producers said this year may see a turning point in the trend.

The world's No. 4 gold miner, Gold Fields Limited (GFIJ.J), said its fourth-quarter output is likely to be 4.5 percent higher than the previous quarter.

Production at its South African operations is likely to be up nearly 7 percent, it added.

Among other precious metals, silver edged down to $16.70/16.78 from $16.64/16.70 late in New York on Tuesday.

Spot platinum was at $2,002.50/2,022.50 versus $2,011/2,031 late in New York, while spot palladium XPD= slipped to $459.00/467.00 an ounce from its previous U.S. finish of $464.00/472.00 an ounce .

(Additional reporting by Raissa Kasolowsky in London; editing by Jim Marshall)