Gold rallied for a second day on Tuesday to reach one-week highs above $1,400 an ounce, taking advantage of a slide in the U.S. dollar ahead of a U.S. policy meeting.
The Federal Reserve gathers for a one-day rate-setting meeting on Tuesday at which policy makers are expected to assess the central bank's $600-billion (U.S.) bond-buying plan but are not forecast to signal any shift or change in the program.
Spot gold rose to a one-week high of $1,406.65 an ounce, before easing to $1,403.55 by 1023 GMT, up 0.8 per cent from the previous close. U.S. gold futures rose 0.5 per cent to $1,404.60.
The dollar remained under pressure after having lost almost 1 per cent against a basket of major currencies on Monday, pushing the euro to three-week highs.
While weakness in the dollar usually acts as a catalyst for bullion buying, soft investor demand, as evidenced by continued outflows from some of the world's largest exchange-traded precious metals funds, could temper price gains in gold.
"Gold is somwhat mixed at the moment. Some of the fundamentals are supportive," said Dan Smith, an analyst at Standard Chartered, who noted the slowing in IMF bullion sales as being a positive for the market.
"Some of the recent fundamental data has been mixed so the inflows into the physical ETFS were quite poor through Q3 and hve back in recent days," he said, adding: "It's difficult to be super bullish at this point given the drivers really."
Gold has risen by over 1 per cent so far this month, driven largely by the gyrations in the dollar and by the concern over the outlook for growth both in the United States and in the euro zone, which continues to grapple with its deepening debt crisis. Yet a near half-percentage point rise in Treasury yields this month presents a serious challenge to investors in gold, which bears no interest and incurs a higher opportunity cost as returns on other asset classes increase.
With the rally in the bullion price back above $1,400, traders in Mumbai said Indian consumer demand has retreated, thereby potentially removing another pillar of fundamental support for gold.
Traders cited buying from Chinese banks behind the strength in the bullion, but said the volume was very light as most funds and traders choose to avoid risks towards the year end.
"Between now and the end of the year fund activities will diminish," said Ronald Leung, a physical dealer at Lee Cheong Gold Dealers in Hong Kong.
In China, the central bank raised reserve ratio requirements for banks for the third time in a month last week but refrained from raising interest rates, a move seen to benefit commodities.
Spot silver rallied for a second straight day to a one-week high of $29.90, before trading at $29.80, up 1.1 per cent on the day.
It has been a major beneficiary of the investor push into commodities this year and the price is now holding around 30-year highs, having almost doubled in 2010 and pushing the ratio of silver to gold to multi-year lows.
But not all investors are as convinced that silver can maintain this performance.
"It would seem as if investors are treating sliver as a cyclically sensitive industrial metal during bullish periods and as a "safe" precious metal during corrections," said asset manager Tiberius in its monthly update.
"Thus, silver seems to be profiting in both scenarios. Silver's fundamentals are poor, however, and we believe it will tend to underperform both industrial as well as precious metals in the months to come."
Platinum also rose to a one-week high of $1,713.49, before easing to show a 0.7 per cent gain on the day at $1,706.74, while palladium rose 0.4 per cent to $757.47.Report Typo/Error