Gold dips but remains near 2-week highs on Fed caution

By Vijaykumar Vedala

BENGALURU (Reuters) - Gold slipped on Tuesday but held near two-week highs as the metal was underpinned by cautious remarks by Federal Reserve chair Janet Yellen, who gave little indication about the timing of U.S. rate increases.

Yellen on Monday provided a largely upbeat assessment of the U.S. economic outlook and said interest rate hikes are coming but gave little sense of when.

After sliding more than 6 percent in May, bullion has risen about 2.4 percent this month so far on diminishing expectations of an earlier than expected rate hike. Higher rates could dent demand for non-interest-paying gold.

Spot gold dipped 0.3 percent to $1,241.80 per ounce by 0649 GMT. It touched a two-week high of $1,248.40 on Monday. U.S. gold fell 0.2 percent to $1,244.40.

"The cautiousness of investors is probably temporary and we would expect investors to take this opportunity to reload and look at further gains in the coming weeks," said Daniel Hynes, an analyst at ANZ in Sydney.

"There are some key data releases this week as well and investors probably don't want to commit aggressively until some of that data is passed. I think they'll be positioning for a general move higher over the next week."

The Fed said on Monday that its index on labour market conditions fell to the lowest since May 2009, reinforcing a perception of slowing job growth following last week's stunningly weak payrolls report.

Almost ruling out the possibility of a rate hike at the Fed's meeting next week, two top U.S. central bankers Dennis Lockhart and James Bullard continued to support the prospects of a rate rise soon after.

"Janet Yellen's cautious jobs comments helped reaffirm the view that the Fed may hold off from raising rates at next week's FOMC meeting," said James Steel, chief metals analyst for HSBC Securities in New York.

"In the near term, there may be more room to the upside as market sentiment has shifted from favouring a near-term rate hike to a more even split between those expecting a rate rise this month and those looking for one later in the year."

Asian stocks hit a five-week high on Tuesday, while the dollar wallowed close to four-week lows against a basket of currencies.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.03 percent to 881.15 tonnes on Monday.

Silver was down 0.7 percent at $16.35 an ounce, platinum fell 0.1 percent to $990.50 and palladium was 0.3 percent lower at $555.16.

(Additional reporting by Koustav Samanta in Bengaluru; Editing by Ed Davies and Anupama Dwivedi)