Gold falls more than 2 percent to two-week low on Fed outlook

By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold prices tumbled more than 2 percent to a two-week low on Thursday, while silver saw its biggest decline in 1-1/2 years after the Federal Reserve signaled it was still on track to lift U.S. interest rates this year.

In Wednesday's policy statement, the Fed said the U.S. economy was expanding "at a solid pace" but reiterated it would be patient in deciding when to increase benchmark borrowing costs.

"The short-term reaction to the Federal Reserve is all of a sudden people saying they could raise rates as soon as June. That's what's turned gold down here," said Bill O'Neill, co-founder of commodities investment firm LOGIC Advisors in Upper Saddle River, New Jersey.

O'Neill said June was when many had expected a rate hike but that before the Fed's statement on Wednesday there had been a recent shift of expectations to later in 2015 or even 2016.

The prospect of higher U.S. rates could encourage investors to pull back from the metal, a non-interest-bearing asset.

The losses that extended from Wednesday's weak session triggered automatic sell orders in precious markets, with many of them touched in spot gold at 11:42 a.m. (1642 GMT) when the contract dropped $6 within a minute. The strength of the downward move surprised traders.

Spot gold fell to a two-week low of $1,251.86 an ounce and was down 2.1 percent at $1,257.01 at 2:20 p.m. EST (1920 GMT). U.S. gold for February delivery settled down 2.4 percent at $1,254.60 an ounce.

Spot silver dropped 6.4 percent to $16.81 an ounce, falling below the 100-day moving average and marking its biggest one-day decline since June 2013.

"The U.S. is still the driver of global growth, the Fed is the only bank considering any sort of tightening, and that is going to weigh on gold," Mitsubishi Corp strategist Jonathan Butler said.

The Fed said it would take "financial and international developments" into account when determining when to raise rates, referencing global markets for the first time since January 2013.

The dollar rose as much as 0.4 percent against a basket of currencies, remaining close to an 11-year peak reached last week, while global equity markets eased.

Palladium fell 3 percent to $768.50 an ounce and platinum was down 3 percent at $1,215.97 an ounce, its weakest performance since October 2014.

Investors will watch U.S. fourth-quarter gross domestic product data on Friday for more clues on the strength of the economy.

"It's possible we can see a bit more weakness with the U.S. GDP coming out Friday," Macquarie analyst Matthew Turner said.