NEW YORK (Reuters) - Gold rose on Wednesday as the market remained firm even as the dollar regained ground against the euro in late trading after the Federal Reserve stated optimism that the U.S. economy was stabilizing.
But gold kept its appeal as an inflation hedge as the Fed pledged to keep interest rates low at a time many investors fear inflation may be picking up. These factors would be bearish for the dollar and bullish for gold in the long term.
Spot gold was bid at $1,137.90 an ounce by 4:15 p.m. EST (2115 GMT), up from $1,124.40 late in New York on Tuesday. It had dipped as low as $1,128.80 after the Fed released its statement.
U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange settled at $1,136.20 an ounce, up $13.20. After the settlement, it moved up to $1,138.90, near its pre-Fed levels.
Gold slipped off session highs for awhile as the dollar rebounded against the euro after the Fed left interest rates unchanged. <USD/>
As had been widely expected, the Fed reaffirmed it would keep short-term rates low. The Fed also said it expected inflation to remain stable for some time.
Investors expect gold to benefit from continued low interest rates, which would keep the dollar weak.
The Labor Department reported that consumer prices edged up a modest 0.4 percent last month, but some analysts said they see signs that inflation has picked up, which would support gold as an inflation hedge.
“The Fed is worried that people sitting at home will keep inflation quiescent, but they are wrong. ... there is no evidence of deflation,” said Delta Global Advisors senior market strategist Michael Pento in California. He cited increases in import prices and other indicators.
At current low interest rates near zero, Pento said, “the Fed has guaranteed negative (U.S.) interest rates as far as the eye can see.”
The low interest rate environment will also favor higher yielding gold as an investment, he said.
The weak dollar had been supporting precious metals earlier in the day, as risk appetite increased with a rise in stocks and commodities. <FRX/>
“Going into year-end, with relatively thin trading in both the currency and the gold markets ... gold is likely to be driven in large by the currency moves,” said Daniel Major, an analyst at RBS Global Banking & Markets.
A softer dollar versus the euro boosts gold’s appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.
Speculative investors attracted to what they perceive to be the metal’s good value after a $100 price retreat from record levels over the last two weeks are also providing key support for gold prices on the downside, traders said.
On the physical side of the market, India’s gold demand turned weak as traders sought lower prices, after the offtake picked up slightly late in the previous session, dealers said.
The SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings were unchanged on Tuesday from the previous session. <GOL/SPDR>
Among other precious metals, silver was at $17.69 an ounce versus $17.41, platinum was at $1,451.50 an ounce versus $1,445.50 and palladium at $371.0 versus $363.80 in late New York dealings.
Additional reporting by Jan Harvey in London; Editing by David Gregorio