NEW YORK Gold rallied over 1.5 percent on Thursday, boosted by a sinking dollar as some investors bet the Federal Reserve's next round of monetary stimulus could be much larger than previously thought.
Uncertainty over the scope and impact of the Fed's attempt to stimulate U.S. economic growth knocked the dollar sharply lower. The widely anticipated announcement is due at the end of the Fed's next policy-setting meeting on November 3.
The Fed has telegraphed its intent to boost the economy through U.S. government bond purchases, or quantitative easing. Investors have been trying to guess how much money the Fed will pump in through the widely anticipated second round of quantitative easing, dubbed "QE2" by Fed watchers.
"This is all just a run into the QE2 news that's coming up on November 3rd," said Fred Schoenstein, metals trader at Heraeus Precious Metals Management in New York.
Spot gold touched a high of $1,345.50 an ounce and was bid at $1,342.35 an ounce at 3:19 p.m. EDT against $1,324.70 late in New York on Wednesday. U.S. gold futures for December delivery closed with gains of $19.90, or 1.5 percent, at $1,342.50 an ounce.
Earlier this month, spot prices retreated after hitting a record high at $1,387.10 an ounce, as investors worried that markets had priced in too much Fed easing.
Gold "is just tracking the dollar now until next Wednesday," said Deutsche Bank trader Michael Blumenroth. "Everything is dependent on the Fed meeting... but in general, I would think we have seen a large part of the correction.
The dollar fell in tandem with Treasury yields as investors reassessed the potential extent of monetary stimulus.
A New York Fed survey of dealers and investors on the size of the stimulus program included scenarios of up to $1 trillion, more than recent estimates.
A smaller amount than expected would likely send precious metals prices a bit lower, though not significantly.
"It's probably going to come in around $500 billion, at least. If we see somewhere around $700 (billion), like the last round, or near $1 trillion, I think we'll have a significant breakout to the upside," said Schoenstein.
He expects silver will test $25 and gold will push up around $1,400 an ounce if the stimulus package comes in on the high side of projections.
"In the medium term, gold should trade higher because the fundamentals are strong regardless of what the Fed will do," said Blumenroth. "This is a time of the year when physical demand is pretty good, and at the end of the day we should trade higher again."
The manager of Pacific Investment Management Co.'s (Pimco) $18.5 billion commodities fund said easier monetary policy from the Fed should help the fund gain about 15 percent this year, helping assets like gold.
INDIAN BUYING PICKS UP
Gold's recent price drop tempted buyers back to the market in India, the world's biggest bullion consumer. Traders hunted bargains to meet ongoing festival and wedding demand, aided by a strong rupee, while scrap sellers in the region held back after prices retreated from record levels.
Among other precious metals, silver was bid at $23.90 an ounce against $23.53.
JPMorgan Chase & Co and HSBC Holdings Plc were hit with two lawsuits on Wednesday by investors who accused them of conspiring to drive down silver prices.
Platinum was at $1,692 an ounce against $1,672, while palladium was at $629.45 versus $612.63. PGMs are currently well supported by fundamentals, analysts said.
"Platinum faces possible supply constraints in South Africa, and reduced shipments from Russian State inventories may constrain palladium supply in the coming years," said RBS Global Banking & Markets in a note.
(Additional reporting by Jan Harvey in London; Editing by David Gregorio)