Gold off 28-yr peak ahead of Federal Reserve meet

The US Federal Reserve is widely expected to lower rates by a quarter-point on Wednesday in a move designed to prevent damage to the US economy from a deteriorating housing sector -- a move often seen negative for the dollar.

The dollar earlier benefited from a Wall Street Journal report saying a Fed rate cut this week is no sure thing and officials were not seriously considering a half-point cut.

A firmer dollar makes gold expensive for holders of other currencies and generally lowers bullion demand.

“It’s sensible to take money off the table ahead of the FOMC meeting if you are long, as there will be better entry points in the market,” said Simon Weeks, head of precious metals trading at Bank of Nova Scotia, referring to the Federal Open Market Committee meeting.

“If the Fed doesn’t cut rates, then there will be a sharp correction in gold,” he added.

Spot gold fell to $784.20/784.80 an ounce by 1447 GMT, down from $788.90/789.70 in New York late on Monday when the metal hit a high of $794.40 -- the highest since January 1980 when prices rose to a record high of $850.

Gold also came under pressure because of moves in external markets. The dollar steadied after hitting record lows against the euro in the previous session, while oil fell more than a dollar from its record highs.

Gold generally moves in the opposite direction to the dollar and is often seen as a hedge against inflation.

Bullish trend

Despite a correction, traders remained positive on gold.

“Overall sentiment in the market is still bullish, with gold eyeing a test of $800,” said Alexander Zumpfe, metals trader at Germany’s Heraeus. “However, the latest upward move seems a bit overdone and I wouldn’t be surprised if we see a correction after $800 has been tested.”

In other bullion markets, benchmark October 2008 gold futures in Tokyo finished down 0.9 percent at 2,911 yen, while the most-active December US gold contract slipped $4.6 an ounce to $787.90.

Gerard Burg, economist at National Australia Bank, said further declines in US interest rates were expected to lift gold prices as incentives to invest in the metal would rise.

Gold was expected to rise by 8 percent to an average of $740 an ounce in 2008, and much of the gain was likely to be related to the dollar weakness, he wrote in a research note.

In industry news, Harmony Gold, the world’s fifth-biggest gold producer, swung to a loss in the quarter to end-June due to falling production and rising costs.

But cash flow from operations was adequate to fund capital expenditure, while output at bigger operations was expected to improve, notwithstanding glitches at smaller shafts, it said. Papua New Guinea miner Lihir Gold Ltd cut its 2007 production forecast by about 6 percent, after strike action reduced its third-quarter output to 157,000 ounces of gold.

But China’s gold output rose 13.1 percent in the first nine months of the year to 191.5 tonnes, but growth slowed from the first half of the year, the National Development and Reform Commission said.

Platinum fell to $1,442/1,446, against $1,454/1,458 an ounce in New York on Monday, when it hit a record high of $1,465. Silver rose to an eight-month high of $14.51 before dipping to $14.30/14.34, against $14.39/14.44. Palladium fell to $366/370 from $371/375 an ounce.