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Gold steadies ahead of expected U.S. rate hike as Fed meets

NEW YORK/LONDON (Reuters) - Gold prices were little changed on Tuesday as an expected U.S. interest rate hike boosted the dollar and weighed on the precious metal, but political risks in Europe provided safe-haven support.

An employee places gold bars in the Kazakhstan's National Bank vault in Almaty, Kazakhstan, September 30, 2016. REUTERS/Mariya Gordeyeva

The dollar index .DXY climbed, making dollar-priced gold costlier for non-U.S. investors.

With a rate increase by the Federal Reserve seen as a done deal, investor focus is shifting to what message the U.S. central bank will deliver when it concludes its meeting on Wednesday. In December the Fed forecast three rate rises this year.

Gold is highly sensitive to rising interest rates, which increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

Spot gold XAU= was down 0.2 percent at $1,201.54 an ounce by 2:59 p.m. EST (1859 GMT), as investors took a wait-and-see approach ahead of the Fed meeting. U.S. gold futures GCcv1 settled down 0.04 percent at $1,202.60.

“Typically, once we get the reality of the rise, the dollar starts to ease off a little and gold tends to recover, and that’s exactly what we’re expecting this time,” said George Milling-Stanley, head of Gold Strategy at State Street Global Advisors.

“There’s a lot out there that’s pretty favourable to gold and that’s the uncertainty out there,” Milling-Stanley added, referring to upcoming European elections.

Gold hit a five-week low on Friday but recovered quickly after a U.S. non-farm payrolls report failed to meet elevated expectations, weighing on the dollar. Gold’s brisk recovery on Friday underlined its resilience, ABN Amro analyst Georgette Boele said.

“We see some stabilization (in gold). The Fed hikes are roughly priced in. Real yields are not rising that fast. Therefore, gold is protected on the downside,” Boele said.

Elsewhere, investors were focusing on Wednesday’s Dutch elections, which have been boosting gold’s safe-haven appeal.

The anti-Islam Party for Freedom is seen as having little chance of coming to power, but a strong election performance for the group would fuel worries over a surprise result in French presidential elections in April and May.

In Britain, concerns have increased over a second Scottish independence referendum and the triggering of Article 50, which would formally begin British negotiations to leave the European Union.

Holdings of SPDR Gold Trust GLD, the world's largest gold-backed exchange-traded fund, rose 0.83 percent on Monday. [GOL/ETF]

Silver XAG= edged down 0.2 percent to $16.91 an ounce, platinum XPT= dipped 0.1 percent to $934.74 and palladium XPD= was down 1.3 percent at $741.20.

Additional reporting by Arpan Varghese in Bengaluru; Editing by David Goodman and Richard Chang