London - Gold prices hit one-week highs on Thursday after the Federal Reserve shocked markets by choosing not to cut back on its asset-buying programme for now, knocking the dollar to a seven-month low against a currency basket.
Bullion gained 4.2 percent on Wednesday, its biggest daily gain since June 2012, after Fed Chairman Ben Bernanke refused to commit to curbing quantitative easing this year.
Many economists had expected a $10 billion reduction in the central bank's $85 billion monthly bond purchases, part of a package of monetary easing measures that have driven a sharp rally in gold in recent years.
Spot gold hit its highest since September 10 at $1,373.20, before steadying to $1,363.80 an ounce by 16:36 SA time.
US gold futures for December delivery jumped 4.3 percent, or $56.10 an ounce, to $1,363.70.
“The market is still digesting the surprise news,” Afshin Nabavi, head of trading at MKS, said.
“I personally think the numbers we are seeing out of the States are still poor, and QE may remain in place for a bit longer. If my reasoning is correct, gold ought to see a bigger boost on the up side.”
“For the next day or two, we ought to trade between 1350-1385,” he added.
“It should be interesting to see the reaction of the Chinese market when they come in on Monday - they could come in as buyers, as we may have seen the lows in gold for the time being.”
China's markets are currently closed for the mid-autumn festival holiday.
Gold, often seen as an inflation hedge and safe-haven investment, has lost some 20 percent of its value this year after the Fed signalled it would start reining in QE, which could indicate the end to ultra-loose monetary policy.
The chance that US interest rates could stay low for longer was enhanced by news from the White House that noted dove Janet Yellen was the front-runner to take over the Fed when Bernanke steps down in January.
An environment of low interest rates encourages investors to put money into the non-interest-bearing assets such as gold.
“The (Fed) decision, combined with the upcoming debt ceiling debate, leaves risks to gold prices as skewed to the upside in the near term,” Goldman Sachs said in a note.
“(But) we continue to expect that gold prices will resume their decline heading into 2014, when we expect economic data to solidly confirm a re-acceleration in US growth and warrant a less accommodative monetary policy stance.”
Analysts say they are watching for signs that the Fed's move is boosting inflows into gold-backed exchange-traded funds.
“The development of ETF holdings over the next few days will give us a clearer picture here,” Commerzbank said in a note.
Among other precious metals, silver rose 1.2 percent to $23.15 an ounce, having rallied around 6.5 percent on Wednesday, its biggest one-day gain since November 2008.
Spot platinum rose to a one-week high of $1,478 an ounce, and was later up 0.2 percent at $1,462.70.
Spot palladium was up 1 percent at $724 an ounce.
Platinum's premium over gold edged back above $100 an ounce after falling below that level during Wednesday's rally. - Reuters