Gold treads water ahead of Fed policy statement

Gold bullion is displayed at Hatton Garden Metals precious metal dealers in London, Britain July 21, 2015. REUTERS/Neil Hall

By Jan Harvey

LONDON (Reuters) - Gold steadied near $1,320 an ounce on Wednesday as traders awaited the outcome of a two-day Federal Reserve policy meeting later, which will be closely watched for any clues on the scale and pace of interest rate hikes this year.

Spot gold was $1,319.56 an ounce at 1200 GMT, little changed from $1,319.84 late on Tuesday. U.S. gold futures for August delivery were down $1.40 an ounce at $1,319.40.

The Fed is expected to leave rates unchanged at this meeting, but its policy statement, due after European markets close, is predicted to sound a more positive note on the economy that may boost expectations for a rate rise later this year.

Gold is particularly sensitive to rising U.S. rates, which would lift the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.

"Our economists are expecting a rate hike in December, but if the Fed starts to sound hawkish now, that could weigh on gold," UBS analyst Joni Teves said. "There are downside risks here."

The dollar rose against a basket of currencies, as reports of a larger than previously expected fiscal stimulus plan for Japan knocked the yen lower. Forex traders are also gearing up for a Bank of Japan policy meeting later this week. [FRX/]

Federal Reserve policymakers are looking for more evidence of a pick-up in inflation before moving on rates, analysts said, as they try to square a string of upbeat U.S. data with a global growth slowdown and other headwinds.

Uncertainty over the path of U.S. rates has eroded nearly 50 percent of the gains gold has made since UK voters shocked the markets by voting last month to leave the European Union. The metal hit a more than two-year high of $1,374.71 an ounce after the move.

"Gold's insurance benefits come at a price on these levels," Julius Baer said in a note. "While Brexit-related uncertainty should be supportive for prices in the short term, the market appears too complacent with U.S. monetary policy."

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, fell by another 4.5 tonnes on Tuesday to 954.24 tonnes. It has seen an outflow of nearly 28 tonnes in the last three weeks. [GOL/ETF]

Among other precious metals, palladium, which hit a nine-month high of $694.30 on Tuesday, was up 0.2 percent at $688 an ounce.

Silver was down 0.2 percent at $19.59, while platinum was up 0.1 percent at $1,093 an ounce.

(Additional reporting by Nallur Sethuraman and Vijaykumar Vedala in Bengaluru; editing by Susan Thomas)