Gold bounces from near 10-month low before Fed decision on rates

[SINGAPORE] Gold bounced from its lowest close in 10 months before the US Federal Reserve's meeting to set interest rates amid unanimous expectations for the first increase this year.

The metal has tumbled in the past month, partly on anticipation of the decision as well as a surge in US equities to records since the election of Donald Trump as president, who has pledged to spur investment. Fed funds futures show investors are pricing further increases in borrowing costs next year. "The reality is the Fed's expected hike should be pretty much priced in," said Robin Bhar, an analyst at Societe Generale SA, said by phone.

While investors will be watching for Fed Chair Janet Yellen's comments on future monetary policy, they shouldn't expect much given the uncertainty over Trump's policies, Mr Bhar said.

"Yellen's hands are tied and will be until there's more policy certainty from the incoming president," he said.

Gold rose 0.3 per cent to US$1,161.94 an ounce by 10.52am in London, according to Bloomberg generic pricing.

It closed at US$1,158.54 on Tuesday, the lowest since Feb 4. Holdings of the metal in exchange-traded funds fell for a 23rd day, the longest losing run since May 2013.

Gold has been battered this quarter, with only sugar showing worse returns among the raw materials on the Bloomberg Commodity Index. A surge in the S&P 500 Index and Dow Jones Industrial Average stock benchmarks are at all-time highs, reducing demand for the precious metal.

A measure of the dollar against its overseas peers is near the highest since at least 2004, making gold dearer for those holding other currencies. ETF holdings fell 1.1 metric tons to 1,830.6 tons on Tuesday, the lowest since June, data compiled by Bloomberg show.

"The strong dollar, rising interest rate is definitely going to be a very big stumbling block for the gold price," Bob Takai, chief executive officer and president of Sumitomo Corp Global Research Co, said by phone from Tokyo.

"Maybe people want to buy crude oil and base metals, which are going to be benefited by fiscal policy by China and fiscal policy of the US."

Still, views differ on the outlook. Singapore-based Oversea-Chinese Banking Corp, the most accurate forecaster tracked by Bloomberg in the third quarter, said last week that it expects lower prices in 2017 as the Fed delivers two additional rate increases.

For the bulls, Commerzbank AG says they may rise to US$1,300 by the final quarter of next year and US$1,400 in 2018 on low real rates and increased demand.

The London-based manager of the Old Mutual Gold & Silver Fund expects gold to strengthen as the Fed fails to increase rates fast enough to keep up with inflation.

BLOOMBERG