Gold edges up ahead of Fed rate hike decision

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold ticked higher on Wednesday as investors awaited the conclusion of a Federal Reserve policy meeting at which the U.S. central bank is expected to raise rates for the first time in nearly a decade.

The Fed began a two-day meeting on Tuesday which is widely expected raise the central bank's target rate by 25 basis points, ending eight years of loose monetary policy. Higher rates would dent demand for non-interest-paying gold, while boosting the dollar. The Fed decision will be released on Wednesday at 1900 GMT.

Spot gold rose 0.5 percent to $1,065.60 an ounce by 0322 GMT, after closing lower in the last two sessions.

"Gold may drop in an initial reaction to a hike. But as the hike is generally expected, any selloff may be relatively short-lived," said HSBC analyst James Steel.

However, a hawkish tone along with the rate hike could trigger a strong rally in the dollar that could make it tough for gold to recover, Steel said.

Investors have sent gold down 10 percent this year in anticipation of higher rates and the dollar strength. The metal fell to near-six-year lows earlier this month.

Some traders say a rate hike is already priced into gold, and any indications from the Fed on Wednesday that further rate hikes would be slow and gradual could send the metal higher.

However, others say it would be difficult for gold to hold on to a rally as the wider environment offers little to justify a rebound. They expect gold to drop to $1,000 or below.

"The gold market is devoid of any funds coming in from gold-backed exchange-traded funds and jewellery demand remains fairly soft," said INTL FCStone analyst Edward Meir.

The number of people holding the top gold ETF, SPDR Gold Trust, is at the lowest since September 2008.

From a technical perspective, gold should fall further, said ScotiaMocatta analysts.

"So far the $1,060 level has held but the risk remains for a test on previous major cycle low of $1,051. A break of $1,051 targets $1,000," they said.

(Reporting by A. Ananthalakshmi; Editing by Christian Schmollinger)