Gold picks up after hitting 1-week low but downside risks persist

By Maytaal Angel

LONDON (Reuters) - Gold recovered from a one-week low on Tuesday as the dollar reversed gains and bond yields came off their highs, but short term risks were to the downside as traders awaited a Federal Reserve policy meeting and U.S. jobs data.

U.S. Treasury yields - the benchmark for world lending rates - moved above 2.7 percent overnight, their highest in 3-1/2 years, helping the dollar off its lows and initially weighing on gold until the trends were reversed.

Still, markets are bracing for potentially hawkish language from the Federal Reserve, which will begin its two-day policy meeting on Tuesday, as all signs are that U.S. economic growth is picking up steam.

"On Friday, U.S. jobs data should confirm the strong picture for the U.S. economy, which speaks in favour of rate rises and a strong dollar, so in the short term gold is under pressure," said Mitsubishi analyst Jonathan Butler.

He added, however: "The dollar is still very much in a long term downtrend and even if we see U.S. yields break out that causes turmoil in other markets especially equities, so we could see risk hedging in gold on the back of that."

Spot gold was up 0.3 percent at $1343.43 per ounce at 1301 GMT, after a 0.7 percent drop in the previous session. Earlier in the day, bullion hit its lowest since Jan. 23.

U.S. gold futures were 0.1 percent higher at $1,341.80.

World equity markets were in their biggest two-day dive in six months, helping safe haven gold, while the dollar index slipped back after climbing overnight amid firmer bond yields.

Rising bond yields increase the opportunity cost of holding non-yielding bullion, while also strengthening the dollar, thus making dollar-priced gold costlier for investors holding other currencies.

Investors are awaiting U.S. President Donald Trump's State of the Union speech due later for comments on the dollar.

U.S. Treasury Secretary Steven Mnuchin gave dollar bears a major boost last week with a tacit endorsement of a weak dollar, though Trump later tried to row back from those comments.

Spot gold may break a support at $1,335 per ounce and fall more towards the next support at $1,316, according to Reuters technical analyst Wang Tao.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.17 percent to 846.67 tonnes on Monday.

Silver rose 0.2 percent to $17.20 an ounce.

Platinum slid 0.7 percent to $997.40 after dropping to its lowest since Jan. 23, while palladium fell 0.1 percent to $1,085.30, after hitting its lowest since Jan. 11.

(Additional reporting by Nallur Sethuraman; Editing by Susan Fenton and Jane Merriman)