NEW YORK (Reuters) - Gold bounced on Wednesday as the dollar retreated from a one-day recovery on the back of a report that cemented market expectations that the Federal Reserve will buy bonds to inject money into the U.S. economy.
Bullion’s 0.7 percent rise was relatively muted after heavy losses on Tuesday, even as the dollar index slid 1.4 percent heading for its biggest one-day decline in nearly four months.
Wednesday’s dollar retreat accelerated after a report from influential consultancy Medley Global Advisors said the Fed planned to launch a program to buy $500 billion of U.S. Treasuries over six months and leave itself room for more purchases.
“We’re seeing a pretty big move in the dollar to the downside and we’re not seeing that reflected as much in the gold market to the upside,” said Jeff Pritchard, an analyst at Altavest Worldwide Trading. “The (gold) market may have gotten ahead of itself...”
Spot gold rose 0.7 percent to $1,345.90 an ounce by 3:10 p.m. EDT. U.S. gold futures for December delivery settled up $8.20 an ounce to $1,344.20.
Gold looks heavily overbought following a near 20 percent rally since mid-July, traders said.
The metal lost 2.5 percent on Tuesday, its biggest one-day drop since July, after China unexpectedly raised interest rates. China’s move sent the dollar index, up nearly 2 percent in the previous session.
Money managers said gold will most likely be a beneficiary of further U.S. easing, which will undermine the dollar’s strength and could lead to inflation.
“Fundamentally, we still think the dollar is likely to stay relatively weak...and gold is being considered an alternative currency among investors,” said Mark Luschini, chief investment strategist of Janney Montgomery Scott, which manages $50 billion client assets.
Another money manager, however, said gold could retreat in the near term due to overbought conditions.
“On a short-term basis, we have seen a trading peak in gold. Sentiment in the short term has reached hyper-bullish levels. So we would not be surprised if we see some more weakness...” said James Dailey, portfolio manager of the Team Asset Strategy Fund. TEAMX.O
Meanwhile, gold is in a seasonal period of demand and is expected to be supported by physical buying related to the Hindu festival of Diwali, a major gold-buying event in top bullion consumer India.
Technical analysts said gold held above key chart support at the bottom of its three-month rising channel near $1,320.
Yet, in the near term the metal could still be on the brink of more losses after a bearish cross-over in the MACD technical charts, analysts said.
Silver rose 2.2 percent to $23.80 an ounce, having also slipped by the most since July 1 on Tuesday, with a 4 percent decline. It is still one of the biggest gainers among precious metals so far this year, gaining 41 percent.
Platinum traded up 0.8 percent at $1,681.49 an ounce, while palladium rose 2.3 percent to $585.49.
Prices at 3:38 p.m. EDT.
Additional reporting by Jan Harvey and Elizabeth Fullerton in London; Editing by Alden Bentley and Dale Hudson