Gold prices drop as market awaits Fed

London (Sept 17)  Gold prices were slightly lower on the London spot market on Thursday, as nervous investors stayed on the sidelines ahead of the US Federal Reserve's decision on whether it will raise interest rates for the first time in nearly a decade.

Spot gold was 0.1 per cent at $US1,119 a troy ounce in morning European trade.

The two-day meeting of the Federal Open Market Committee will conclude Thursday with the release of a statement. Investors are nervous about holding gold in case the committee decides to raise US interest rates.

"Expect a huge decline in gold prices if the FOMC hikes rates tonight," Howie Lee, an investment analyst at Phillip Futures, said in a note.

A rate increase hurts gold because the metal doesn't offer a yield so has an easier time competing with interest-yielding assets, like Treasuries, when rates are set near zero. Also, a rate increase would likely strengthen the dollar. Gold is widely traded in dollars, so it becomes more expensive to buy in other currencies, like rupees or yuan, when the greenback gains.

On Thursday, rates will be the dominant theme, with gold prices expected to trade in a narrow range ahead of the FOMC decision and on low volume. Although gold gained on Wednesday, it did so amid light trading.

While most analysts don't think there will be any change in interest rate policy before December, markets are likely to remain jittery until this is confirmed.

"We should expect nervous trading this afternoon, with some book squaring," said William Adams, head of research at Fastmarkets, in a note.

Market views of US interest rates have come to dominate the way gold is trading, overriding its more traditional role as a haven, some analysts say. This is likely to continue over the coming quarters, said Xiao Fu, head of commodity markets research at BOCI Global Commodities.

Still, "at current level, it seems that gold is slightly oversold relative to what the US rates market has priced in for rate increase scenarios," she said.

In recent sessions, other precious metals have followed gold higher.

Among them, spot silver was down 0.4 per cent at $US14.86 an ounce, spot platinum was down 0.91 per cent at $US963 an ounce and spot palladium was down 0.69 per cent at $US607.75 an ounce.

Source: Business-Spectator