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Gold jumps after Fed says to buy Treasuries

NEW YORK (Reuters) - Gold prices turned higher on Tuesday after the U.S. Federal Reserve said it would buy longer-term government debt to boost a sputtering economic recovery, increasing the metal’s investment appeal.

Gold benefited from renewed economic uncertainty after the Fed’s decision to reinvest mortgage bond proceeds to keep borrowing costs down, representing a significant policy shift for the Fed that just a few months ago had been debating an exit strategy from market stimulus.

A weakening dollar against the euro and the yen after the Fed's policy statement also prompted gold buyers to step in, as U.S. stocks cut losses after the Fed's announced measures designed to boost sluggish economic growth. .N

James Steel, chief commodity analyst at HSBC, said that quantitative easing by the U.S. central bank and long-term inflation concerns boosted gold prices.

“Quantitative easing keeps the yield curve steep, increases money supply and keeps short-term interest rate low -- all of those things are positive for gold prices,” he said.

“A higher monetary supply always lead to worries about inflation longer term, and it tends to be good for hard assets like gold,” Steel said.

Spot gold was at $1,205.60 an ounce at 2:48 p.m. EDT (1848 GMT), against $1,200 late in New York on Monday.

U.S. gold futures for December delivery were up $5.10 at $1,207.70 an ounce, after settling at $1,198 prior to the FOMC statement.

The Fed, which left benchmark overnight interest rates steady in a zero to 0.25 percent range, also renewed its pledge to keep them low for an extended period, as widely expected.

Speculation has emerged in recent days that the Fed may take new measures to extend its quantitative easing program, such as reinvesting funds to maintain its balance sheet.

Any signs of further quantitative easing are likely to be negative for the dollar, and positive for gold, analysts said.

In earlier trade, gold cut losses after government data showed that U.S. business productivity fell for the first time in 1-1/2 years in the second quarter and labor costs hardly rose.

A stronger dollar, however, kept gold prices lower prior to the Fed’s statement.

INDIAN BUYING

Gold’s retreat from last week’s three-week highs resulted in a slight improvement in Asian physical demand.

Traders bought more metal in India, the world’s largest gold consumer, as prices eased below $1,200 an ounce.

Physical gold demand tends to rise in August as jewelers begin to stockpile inventory ahead of the start of India’s wedding season and the Hindu festival of Dhanteras, traditionally major gold-buying events.

Among other precious metals, silver was at $18.34 an ounce versus $18.29, platinum was at $1,536.50 an ounce versus $1,540 and palladium was at $473.50 versus $475.

The platinum-gold ratio -- a measure of how many ounces of gold are needed to buy an ounce of platinum -- eased to a 2-1/2 week low of 1.28, showing gold was becoming increasingly expensive compared to platinum.

Additional reporting/graphic by Jan Harvey and Amanda Cooper in London; Editing by Lisa Shumaker

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