Gold holds near three-week high as odds drop for Fed rate rise

[SINGAPORE] Gold held near its three-week high as weaker US economic data damps prospects for an interest-rate increase this month by the Federal Reserve.

Bullion for immediate delivery traded at US$1,346.53 an ounce at 11:04am in Singapore, according to Bloomberg generic pricing. The metal touched US$1,352.74 on Wednesday, its highest intraday level since Aug 19.

Gold is heading for the first annual gain in four years as demand has surged for haven assets following the Fed's hesitation in raising borrowing costs and the UK's vote to exit the European Union. Weaker US data, including a drop in a services gauge on Tuesday to a six-year low, is dimming the outlook for a rate increase.

Investor's attention is now trained on the European Central Bank, which will review policy on Thursday and is forecast to maintain its unprecedented stimulus measures as President Mario Draghi lays out fresh growth and inflation projections for the euro area. Weekly jobless claims in the US follow later in the day.

"Eyes would also be on tonight's initial jobless claims, where any disappointment above the 265,000 mark should further fuel calls for the Fed to keep its rates on hold in its upcoming September meeting," Barnabas Gan, an economist at Oversea-Chinese Banking Corp, said by e-mail.

"Gold should go higher given tapering expectations of a Fed rate hike in both September and December."

Odds for tightening in September dropped to 22 per cent as of Wednesday, from 34 per cent at the start of the month, while the probability of a move in December is at about 52 per cent, according to the prices of federal funds futures contracts.

Either a deferral or a 25 basis point hike soon would be "good for gold", according to RBC Capital Markets.

"In the event the Fed announces a 25bps rate hike, it will be a forced hand, rather than a move to cool the economy, and as such would be more likely to be a one-time decision, potentially pushing out even further any additional raises," RBC analysts led by Paul Hissey said in a note dated Sept 7.

The US economy grew at a modest pace in July and August as a strong labour market failed to put much upward pressure on wages and prices, according to the Fed's latest Beige Book release published Wednesday.

Holdings in bullion-backed exchange traded funds fell 0.9 metric ton to 2,030.1 tons on Wednesday, data compiled by Bloomberg show.

In China, bullion of 99.99 per cent purity was little changed at 289.30 yuan a gram on the Shanghai Gold Exchange.

On the Shanghai Futures Exchange, gold for December delivery dropped 0.3 per cent to 290.10 yuan a gram, while silver lost 0.2 per cent to 4,406 yuan a kilogram.

Spot silver added 0.4 per cent, platinum rose 0.1 per cent and palladium climbed 0.7 per cent.

BLOOMBERG