Updated from 12:03 p.m. EDT
Gold continued its climb above $700 an ounce on Wednesday, boosted by dollar weakness ahead of the
decision on interest rates.
Gold for June delivery finished up $4.20, or 0.6%, at $705.70 an ounce after earlier reaching a morning high of $706.80, a level unseen since 1980.
Among other metals, silver for July delivery took a breather, losing 18 cents to $14.28 an ounce. But copper for July delivery continued to rally, adding 9.20 cents to $3.6880 a pound, amid ongoing supply constraints.
The precious metal has remained supported by expectations of further dollar weakness once the central bank signals intentions to pause its 22-month-long campaign to raise interest rates.
But after delivering another quarter-point rate hike (after metals markets had closed) on Wednesday, the Fed didn't provide such a clear signal in the accompanying statement, saying it would continue to monitor economic data to determine further policy moves.
"This will help the dollar get a little bounce and for gold this may mean a bit of a pull-back," says Amaury Conti, equity trader at San Antonio-based investment adviser Austin Calvert & Flavin. "Nothing has changed in the medium to long-term
bullish trend for gold, but I wouldn't be surprised to see some downside over the next couple of days."
A weak dollar raises the value of dollar-denominated commodities, such as gold, as it takes more of the currency to buy the same amount of the metal.
Wednesday morning, the greenback hit its lowest level in a year vs. the euro and an eight-month low vs. the yen but it pared some of its losses after the Fed statement failed to clearly signal a pause in rate hikes.
Yet, gold for June delivery, which originally dipped after the Fed statement, was recently adding 50 cents to $706.20 an ounce in electronic trading.
The dollar faces another challenge Wednesday with the U.S. Treasury set to issue, after the market's close, a report in which it might brand China a "currency manipulator."
China has been pressured by the U.S. to let its currency, the yuan, appreciate to help adjust global trade imbalances. But such an adjustment would also imply further dollar weakness.
Should the Treasury fall short of branding China a manipulator, the dollar could find some support, while gold and other metals might drop.
But according to Bart Melek, senior economist at BMO Nesbitt Burns, there are other factors buttressing the case for dollar weakness and gold strength: For a variety of reasons, central banks are diversifying their foreign-exchange reserves away from the greenback.
On Tuesday, speculation that China will diversify its forex reserves, now the largest in the world, away from the dollar and into gold, helped push the yellow metal above the $700 mark, Melek says.
A report by
China Gold News
quoted Chinese economist Liu Shanen as saying that China should quadruple its holdings of gold, according to
The Wall Street Journal
. Liu works with the Beijing Gold Economy Development Research Center, a government organization with close ties to Chinese mining groups, the Journal notes.
Another cause of dollar weakness is the expectation that Iran is set to launch an exchange in which it will trade oil in euros, according to Melek.
"If China actually starts going into the market to buy gold and Iran switches to euros as their transaction currency for their oil trade, in the current environment of Mideast instability, gold could move significantly over $800 per ounce," he says.
Meanwhile, crude oil -- which reached $75 a barrel a few weeks ago amid jitters over Iran's nuclear ambitions - advanced $1.44 at $72.13. Crude was weaker in morning trade after news of rising U.S. inventories but rebounded on expectations that might more gasoline might be needed for the summer driving season.
Gold has been tracking crude oil prices in recent weeks, as it acts both as a hedge against inflation and as a safe haven amid geopolitical jitters.
Both gold and crude advanced Tuesday after the U.S. rejected a letter from Iranian President Mahmoud Ahmadinejad as unhelpful in solving the current stalemate.
Last week, members of the United Nations Security Council proposed a draft resolution calling on Iran to stop enriching uranium. They also referred to "Chapter Seven" of the U.N. Charter, which opens the door to possible sanctions or military action.
Meanwhile, the shares of metal mining companies mostly reversed a positive morning trend and were mixed in recent action. The Philadelphia Gold and Silver index was down 0.3%, the Amex Gold Bugs index was losing 0.4% while the CBOE Gold index was adding 0.3%.
Among the biggest gainers,
was rising 1.8%,
was up 0.7%, and
Golden Star Resources
was up 0.8%.