Gold turned higher early on Wednesday as the dollar fell after an influential consultancy said the Federal Reserve planned to buy $500 billion of US Treasuries over six months to spur the economy. The metal lost 2.5 percent on Tuesday, its biggest one-day drop since July, after China unexpectedly raised interest rates. China's move sent the dollar index, a gauge of the greenback's strength against a basket of six currencies, up nearly 2 percent.
On Wednesday, bullion gained less than 1 percent, even as the dollar index slid 1.3 percent and appeared on track for its biggest one-day decline in nearly four months. Gold rose less than the dollar declined partly because the gold market has been heavily overbought following a near 20 percent rally since mid-July, traders said.
"We're seeing a pretty big move in the dollar to the downside and we're not seeing that reflected as much in the gold market to the upside," Jeff Pritchard, an analyst at Altavest World-wide Trading, said. Spot gold rose 0.6 percent to $1,343.85 an ounce by 1:20 pm EDT (1720 GMT). US gold futures for December delivery climbed $8.40 an ounce to $1,344.40.
Gold, which is denominated in dollars, tends to move in the opposite direction to the US currency. The 100-day correlation between bullion and the dollar, however, was a negative 0.16, Reuters data showed, suggesting their long-term inverse relationship was weak.
Tom Pawlicki, precious metals and energy analyst at futures broker MF Global, said gold should benefit from further monetary easing. Gold is likely to be supported in the near term by the forthcoming Fed meeting and the Indian festival of Diwali, a major gold-buying event that traditionally brings strong demand for the metal, Standard Bank analyst Walter de Wet said.
Silver rose 2.1 percent to $23.82 an ounce, having also slipped by the most since July 1 on Tuesday with a 4 percent decline. It is still one of the biggest climbers among precious metals so far this year, up 41 percent. Platinum traded up 0.9 percent at $1,681.99 an ounce, while palladium rose 2.5 percent to $587.45.
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