Gold fell more than 1 percent on Wednesday as the dollar strengthened ahead of an interest rate decision by the US Federal Reserve which is expected to provide clues on monetary policy this year. Gold is highly exposed to interest rates, particularly in the United States, as higher rates lift the opportunity cost of holding non-yielding assets and boost the dollar, in which gold is priced.
The Fed is expected to keep US interest rates unchanged on Wednesday in its first policy decision since President Donald Trump took office, as the central bank awaits greater clarity on his economic policies. "It's a little too early for the Fed to press ahead with the rate hike at the moment but it will be interesting to see the comments they make with regards to Trump's presidency and the expectations for inflation," said Capital Economics commodities economist, Simona Gambarini.
Capital Economics expects rate hikes in the second half of the year, Gambarini said, which could hurt gold.
Spot gold was down 0.8 percent at $1,200.77 an ounce by 1535 GMT, after touching a session low of $1,213.20. US gold futures fell 0.7 percent to $1,202.70 an ounce. Gold gained more than 5 percent in January - its best month since June 2016 - as the dollar suffered its worst start to the year in three decades, hurt by Trump's comment that every "other country lives on devaluation."
The dollar index, which measures the greenback against a basket of currencies, firmed to 0.4 percent on Wednesday. ETF Securities said it expects gold to end the year at $1,230 per ounce about 2.5 percent from Tuesday's close. "Gold prices could rise 8 percent in the first half of the year, aided by a weaker dollar. However, the dollar strengthening in the second half of the year and subdued enthusiasm for the metal in the futures market could drive a sell-off."
The bullish view is underscored by some of Wall Street's largest fund managers betting on gold, wagering that Trump's governing style and upcoming elections in Europe will combine to create more stock market volatility and boost demand for the metal seen as a safe haven.
Spot silver fell 0.7 percent to $17.40 an ounce, after touching its highest in more than 11 weeks at $17.61. Platinum inched higher, up 0.32 percent at $996 an ounce. Palladium briefly touched its best in a week but pared gains to trade up 0.9 percent at $757.22.