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Gold prices rose in Europe on Wednesday ahead of a Federal Reserve monetary policy statement later in the day, at which the US central bank is expected to announce more stimulus measures to support the country's economy.
Analysts say the Fed, which ends a two-day policy meeting later on Wednesday, is likely to unveil monthly debt purchases of $45 billion, which will come on top of mortgage bond buying of $40 billion a month the bank started in September.
Further easing measures would likely support gold by stoking inflation fears and maintaining pressure on long-term interest rates, the opportunity cost of holding non-yielding bullion.
Spot gold was up 0.49 percent at $1,718.3 an ounce at 16:47 SA time, while US gold futures for December delivery were up $10.10 an ounce at $1,719.70.
“If the Fed does what everyone expects, we will probably see a little bit of upside in the gold price,” said Nic Brown, analyst at Natixis.
“If the Fed terminates the stimulus programme, you could have a lot of downside in gold. However, that is unlikely because of negotiations on the 'fiscal cliff'.”
The fiscal cliff is tax hikes and spending cuts that kick in early in 2013.
Brown said uncertainty over the outcome of talks on the US budget made it less likely that the Federal Reserve would halt stimulus measures.
“I don't think the Fed would want to do anything that would jeopardise a recovery,” he said.
David Govett, head of precious metals at Marex Spectron, said: “If the Fed comes out and says it is going to put $45 billion into long term Treasuries, on the face of it that is good for gold.
“However, I think a lot of that concept is priced into the market already. You'll see an initial blip... we could see gold rally up to $1,725, $1,730. If they say they are going to increase the amount, gold will rally further.
“However, if they don't do it, or they decrease the amount, I think gold is vulnerable on the downside.”
European stocks rose ahead of the announcement, while the dollar eased 0.3 percent against the euro, as investors anticipated more Fed stimulus.
“For us, the most important precondition for gold gains is loose monetary policy,” UBS said in a note.
“We don't think gold has priced in a sizeable expansion in the Fed's balance sheet beyond current levels, but we do think that quantitative easing will again loom large in the first half of 2013. This overrides many other potential gold drivers.”
ETF HOLDINGS RETREAT
Reuters data showed holdings of gold exchange-traded funds retreated on Tuesday, with both London-based ETF Securities and New York's SPDR Gold Trust reporting outflows. Holdings of products tracked by Reuters fell 108,000 ounces.
China, the world's biggest gold miner, produced 34.6 tonnes of gold in October, bringing total output over the first 10 months of the year to 322.8 tonnes, up 11 percent from a year ago, a government department said on Wednesday.
Among other precious metals, silver was up 1.24 percent at $33.35 an ounce, tracking gold. Spot platinum was up 0.57 percent at $1,642.25 an ounce, while spot palladium was up 1.16 percent at $697.50 an ounce.
The gold/platinum ratio, which measures the number of platinum ounces needed to buy an ounce of gold, fell to a two-month low on Wednesday at 1.05, and platinum narrowed its historically unusual discount to gold to around $75, well below its average this year of $122.
Platinum and palladium have outperformed in recent months, rising nearly 8 percent and 19 percent respectively since late October, with the autocatalyst metals benefiting from a brighter economic outlook in China and the United States.
The planned launch of a physical platinum and palladium fund by Sprott also underpinned sentiment, traders said.
Sprott, which already manages physical gold and silver ETFs, plans to sell 35 million units, each worth $10, which will be split into equal halves to buy physical platinum and palladium, it said in a filing this month.
The trust could buy more than 107,000 ounces of platinum and 253,000 ounces of palladium, raising the amount of metals held by ETFs by 7 and 14 percent respectively, Reuters calculations showed. - Reuters