Gold steadies with rate rises in focus; palladium at record high

[NEW YORK] Gold steadied around a 3-1/2-month high on Thursday as prospects for further US interest rate increases put the brakes on a recent rally, while palladium touched record highs on tight supplies.

Spot gold rose 0.5 per cent to US$1,319.27 an ounce by 1.45pm EST (1845 GMT), while US gold futures for February delivery settled up US$3.10, or 0.24 per cent, at US$1,321.6 per ounce.

Palladium rose 1.2 per cent to US$1,095.24 an ounce, earlier hitting a record high of US$1,105.70.

The US dollar hit a four-month low against the euro amid optimism about the euro zone economy. However, gold, which tends to move counter to the US currency, was unable to capitalise on the dollar weakness and hovered just below its 3-1/2-month high hit yesterday.

"(Gold) is beginning to look overvalued. Our fair value for gold assuming a (US) rate hike in March and June is around US$1,230, so at current prices it looks expensive," said James Butterfill, head of research at ETF Securities.

Still, after digesting the US Federal Reserve's minutes from its December policy meeting released on Wednesday, market participants have begun to doubt the sentiment that recent US tax changes will lead to inflation, and the widely-expected path of future rate hikes, analysts said.

"They're starting to doubt that the Fed will hike rates as much as they said they will. That provides a more attractive environment for gold," said Daniel Ghali, commodities strategist at TD Securities in Toronto.

Gold is highly sensitive to rising US interest rates because they increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

Gold also benefited from safe-haven purchases.

"That's why we think its likely to continue to trade between US$1,200 and US$1,300 over the next six months," Butterfill said.

Spot gold marked its highest since Sept 15 at US$1,321.33 on Wednesday but eased as the dollar recovered after minutes from the Fed's December policy meeting had initially bolstered expectations for more increases to US interest rates.

Palladium's price jumped 56 per cent last year on fears of a shortage fueled by Chinese car sales growth, tightening emissions controls and a swing away from diesel cars in Europe.

"We see palladium prices remaining well supported, although there is a danger from here of a short-term pullback as investors take profits," Mitsubishi said in a note.

Silver rose 0.3 per cent at US$17.18 per ounce after earlier hitting a eight-week high at US$17.26.

Platinum rose 0.7 per cent to $963 an ounce after earlier touching a 3-1/2 month high of US$964.80.

REUTERS