Gold futures settled lower at $1366 per ounce on Tuesday as U.S. equities rallied and bullion buyers took to the sidelines before the conclusion of a two-day Federal Reserve policy meeting they hope will give greater clarity on the outlook for U.S. monetary policy.
The metal fell for a second day as its safe-haven appeal was reduced by the rise of U.S. equities on hopes that the Fed will maintain its current level of stimulus at the end of its Open Market Committee meeting on Wednesday.
Traders are trying to anticipate the Fed's timetable for winding down purchases of $85 billion per month of bonds, a program known as quantitative easing.
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Gold, a traditional inflation hedge, has been under pressure after top Fed policymakers said the central bank could scale back its stimulus measures. Analysts said, however, gold could stage a short-covering rally after the conclusion of the meeting.
"Should the FOMC not come any closer to giving greater clarification on the asset-buying program, then the gold market could rally and investors who have been shorting gold in anticipation of a Fed move away from QE may have to cover," said James Steel, chief precious metals analyst at HSBC. "This could prompt a challenge of the $1,400 an ounce level," Steel said.
Spot gold was down 1.3 percent at $1,366 an ounce.
U.S. gold futures fell $16.20 an ounce to end at $1,366.90 per ounce. Concerns that U.S. monetary policy may be reined in have helped knock gold prices 18 percent lower this year.
Gold analysts say that move may have become overdone, however. "Gold is trading weaker on the fear that the FOMC may reduce the volume (of quantitative easing)," said Peter Fertig, a consultant at Quantitative Commodity Research. "But if anything they will be scaling out gradually, there will not be an abrupt end to QE."
Indian, Chinese Buyers Hold Off
Physical demand retreated in India and China, the top two consumers of bullion, from peak levels reached after a steep sell-off in April. A Hong Kong precious metals trader said premiums there had fallen to $2 an ounce over London spot prices, from a high of $6 last month.
Hong Kong sells mainly to buyers in China. Any signs of a significant slowdown in the Chinese market would be a big blow to bullion prices because investors expect China to offset slower buying from India.
Demand in India has eased since the government increased the import duty on bullion by a third in an effort to reduce its current account deficit.
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