Gold holds near two-week high on Fed rate caution

By Jan Harvey

LONDON (Reuters) - Gold eased on Tuesday as investors turned cautious after the metal failed to sustain a recent rally, though it held near the previous day's two-week high after the Federal Reserve further dampened speculation about an imminent U.S. rate rise.

U.S. Federal Reserve Chair Janet Yellen on Monday provided a largely upbeat outlook for U.S. economy and said interest rate increases were coming, but investors focused on her lack of guidance about when they would materialise.

Spot gold was down 0.3 percent at $1,240.71 an ounce at 0934 GMT, while U.S. gold futures for June delivery were down $3.90 an ounce at $1,243.50. It hit its highest since May 24 on Monday at $1,248.40.

Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which the metal is priced.

After sliding 6 percent in May after Fed officials struck a more hawkish tone on rates, gold has risen about 2.4 percent so far this month as expectations for a summer rate rise faded.

It rallied nearly 3 percent on Friday alone after U.S. payrolls data for May came in much weaker than expected. However, it failed to overcome resistance in the $1,240-1,245 area and is now treading water.

"Yellen was pretty noncommittal - she didn't give a timeframe for rate rises," Societe Generale analyst Robin Bhar said. "There's a bit of indecision here. We had the knee jerk reaction on the non-farm payroll numbers, and now gold is hesitating over where to go."

"The next $20 is difficult to call," he said. "It's had a big rally, but what's the next catalyst to push it higher?"

Almost ruling out the possibility of a rate rise 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 increase soon after.

World stocks hit five-week highs on Tuesday on Yellen's dovish tone and a seven-month peak in crude prices cheered oil companies. [MKTS/GLOB]

Holdings in the world's largest gold-backed exchange-traded fund, New York-listed SPDR Gold Shares, fell 0.03 percent to 881.15 tonnes on Monday. [GOL/ETF]

"Over the past week holdings have increased 12.5 tonnes, and it shall be interesting to see whether holdings expand, we plateau, or see some selling at these higher prices," MKS said in a note.

Among other precious metals, silver was down 0.8 percent at $16.27 an ounce, platinum fell 0.1 percent to $990 and palladium was 1.2 percent lower at $550.50.

(Additional reporting by Vijaykumar Vedala and Koustav Samanta in Bengaluru; editing by David Clarke)