Gold at 1-1/2-week high after Fed holds rates steady

By Marcy Nicholson and Eric Onstad

NEW YORK/LONDON (Reuters) - Gold prices rose to 1-1/2-week highs on Wednesday, extending gains after the U.S. Federal Reserve held interest rates unchanged but sent a strong signal for monetary policy tightening before the end of 2016.

"The case for an increase in the federal funds rate has strengthened," the U.S. central bank said in a statement following a two-day policy meeting.

Spot gold was up 1.2 percent at $1,330.08 an ounce by 2:58 p.m. EDT (1858 GMT), after rising to $1,335.01 an ounce, the highest since Sept. 9.

U.S. gold futures settled up 1 percent at $1,331.40 prior to the release of the Fed statement.

"Gold rallies the most in two weeks as a timorous majority managed to impose its will over three dissenters," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York.

"Gold is being bought as the market considers that the Fed now has three months to find an excuse to skip even a December hike and a realization 2017's voting Fed Presidents are much more dovish than the current group."

Three of the policy makers dissented on the policy statement, saying they favored raising rates this week.

"Overall, while the statement and dissents were more hawkish than expected, the dovishness contained in the SEP (Summary of Economic Projections) appear to be driving markets," said Royce Mendes, director and senior economist at CIBC Capital Markets in Toronto, adding that the bank expects a rate hike in December.

The U.S. dollar index fell around 0.3 percent against a basket of major currencies.

Gold was already firm in earlier trade, along with stock markets, after the Bank of Japan overhauled its monetary policy framework, switching to targeting interest rates and side lining more than three years of massive money printing.

"It provided a bit of a lift to gold as well as well as other assets, but certainly we are going to be more or less on hold until we see the Fed statement later," analyst Tom Kendall at ICBC Standard Bank in London said.

In other precious metals, spot silver gained 2.4 percent at $19.72 an ounce.

Platinum climbed 2.3 percent at $1,049.20 and palladium rose 0.2 percent at $682.50.

Macquarie does not expect any significant rally in platinum until 2018 or 2019, the bank said in a note.

"The price will remain far lower than it has been in the past, a legacy of declining diesel (vehicles) and the prospect of EVs (electric vehicles), though platinum's relatively broad range of uses will help cushion the blow."

(Additional reporting by Swati Verma and Nallur Sethuraman in Bengaluru; editing by Susan Fenton and Diane Craft)