Gold hits fourth high as Fed inches toward action

NEW YORK (Reuters) - Gold prices climbed to a fourth consecutive record high near $1,300 an ounce on Tuesday after the U.S. Federal Reserve inched nearer to taking new steps to stimulate the U.S. economy and expressed concerns about low inflation.

Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo September 17, 2010. Spot gold hit a new record high of $1,277.75 an ounce on Friday, as investors remained concerned about economic prospects. REUTERS/Yuriko Nakao

The prospect of further Fed action to prevent prices from falling prompted investors to buy bullion as a hedge against both economic uncertainty and inflation. This reversed a dip early in the session that was spurred by signs of stability in U.S. housing data.

As expected, the U.S. central bank did not move to extend the purchases of government debt, or quantitative easing, that helped fuel gold’s 17 percent gain this year. But its renewed attention on the risk of deflation was sufficient to put gold into the black.

“The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate,” the Fed said in a statement.

Spot gold, which had hit five record highs in the past six days, reversed early losses and rose to a new record of $1,290.70 an ounce by 3:56 p.m. EDT (1956 GMT) from around $1,272 prior to the Fed announcement.

U.S. gold futures for December delivery slipped $6.50 during the trading session to settle at $1,274.30, but after the Fed announcement the price jumped to a peak at $1,292.40 an ounce.

Total COMEX gold trading volume was about a quarter higher than the past 30-day average at around 133,000 lots.

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“I think the gold bulls really got what they wanted from this Fed policy statement,” said Bill O’Neill, partner at LOGIC Advisors in Upper Saddle River, New Jersey.

“Even though there’s no fear of inflation, they actually showed a fear for deflation, which is also bullish for gold as it creates uncertainties. It looks like we are onward and upward to $1,300.”

Earlier in the day, gold slipped after data showed that groundbreaking for new U.S. homes jumped in August to a four-month high, a bigger than expected rise that hinted at some stability in the housing market. This briefly diminished safe-haven demand for gold.

The possibility of Fed stimulus has kept many traders bullish about gold, which remained sharply below its inflation-adjusted all-time high above $2,200 an ounce. (Graphic:

Further quantitative easing would probably be accompanied by continuing low interest rates, which could undermine the U.S. dollar. (Graphic: )

A weaker dollar often boosts gold. Although that inverse relation has been shaky this year, the correlation has strengthened in the last five days to a negative 0.5.

Additional reporting by Jan Harvey in London; Editing by David Gregorio