Gold price takes heart from weaker dollar

London (Oct 30)  Gold edged higher on Friday as a retreat in the dollar helped the metal to snap two days of losses, but prices remained near three-week lows after the US Federal Reserve indicated that it may still raise interest rates this year.

Gold is on track for its biggest weekly drop in nine weeks, down 1.4%, after the Fed indicated after its two-day policy meeting this week that a December rate rise is still a possibility.

Rising interest rates tend to weigh on gold because they lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

Spot gold was up 0.2% at $1,148.06 an ounce by 10.23am GMT, while US gold futures for December delivery were up 60c at $1,147.90.

"The market was clearly anticipating kicking rate rises into the long grass, and of course a December rate rise is still very much on the cards," Mitsubishi analyst Jonathan Butler said.

"The correction was a perfectly natural response to that.

"(But) it’s interesting that we’ve only traced back to where we were in early October. There may be further pain to come as the Fed’s intentions become clearer, but with yields having moved higher, probably the worst is over in the very short term."

Gold took some support from a 0.3% drop in the dollar against a basket of currencies, with the yen strengthening after the Bank of Japan made no move on monetary policy, disappointing some speculators who had bet that the central bank would expand its huge stimulus programme.

Expectations that the Fed may raise rates while other central banks loosen monetary policy is still likely to support the dollar in the longer term, however, weighing on gold.

"The reality of tightening US monetary policy is still set to strengthen the US dollar and see Treasury yields rise," Societe Generale analysts said in a note. "Against this backdrop we still expect both gold and silver to drop markedly."

Silver prices are on track for the biggest fall of the main precious metals this week, down 1.5%. Silver was down 0.1% at $15.54 an ounce on Friday.

As silver underperformed, the gold-silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, rose back to 73.8 on Friday, recovering further from the four-month low of 71.3 hit earlier this month.

Spot platinum was flat at $989.50 an ounce, while spot palladium was up 1.6% at $678.50.