Gold steadies as investors seek cues on U.S. rate hike timing

By Clara Denina

LONDON (Reuters) - Gold steadied on Wednesday as the dollar softened, but was still trading around a 5-1/2-year low hit last week as investors awaited the outcome of a Federal Reserve's meeting for cues on the timing of the first U.S. rate rise in nearly a decade.

Policymakers are likely to reaffirm that only consistent signs of a strong U.S. economy and labour market would put them on track to raise interest rates in coming months, analysts said.

For non-interest yielding gold, higher interest rates mean prices could come under pressure.

"We bounced from the low but we are little changed and waiting for the Fed's statement tonight and the second-quarter GDP tomorrow," Societe Generale analyst Robin Bhar said.

 

"These are the two events that should set direction for the next few weeks although the market is expecting no change in the Fed's language."

Spot gold > was up 0.1 percent at $1,096.45 an ounce by 0950 GMT, while U.S. gold for August delivery was unchanged on the day at $1,096.30 an ounce.

The metal touched $1,077 last week, its weakest since February 2010, following a selloff on exchanges in New York and Shanghai, when investors cut their exposure on fears of further price declines.

After breaching the $1,100 support level, gold has found it tough to recover and stay above that mark, indicating bearish investors continued to hover in the market.

The dollar was down 0.2 percent against a basket of leading currencies ahead of the policy statement due at 1800 GMT.

"If a rate hike in September were to be signalled, this would doubtless drive up the US dollar, which would ultimately weigh on the gold price, for the Fed Fund Futures have so far only priced in roughly 40 percent of a rate hike in September," Commerzbank said in a note.

European equities advanced, spurred by gains in U.S. and Asian markets on hopes that Beijing could stem the rout in its markets without damage to the world's second-biggest economy. [MKTS/GLOB]

Global gold demand shrank to its lowest since 2009 in the second quarter as China poured funds into its now troubled equities market, according to a report by GFMS, a division of Thomson Reuters.

Holdings of the largest gold-backed exchange-traded-fund, New York's SPDR Gold Trust , were unchanged at 21.87 million ounces on Monday, the lowest since September 2008, following a seven-day slide. [GOL/ETF]

Spot palladium > gained 0.6 percent to $622.75 an ounce and platinum > rose 0.1 percent to $982.50 an ounce, both not far above multi-year lows. Silver > was unchanged at $14.66 an ounce.

(Additional reporting by Manolo Serapio Jr in Manila; Editing by)