Gold slips, but holds near 2-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 gave a largely upbeat outlook for the U.S. economy on Monday and said interest rate increases were coming, but investors focused on her lack of guidance about when they would materialise.

Spot gold was down 0.4 percent at $1,240.50 an ounce at 1405 GMT, while U.S. gold futures for June delivery were down $4.60 an ounce at $1,242.90. Spot gold 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 non-committal - she didn't give a time frame 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."

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.

"There doesn't seem to be any reason to sell gold over the next few weeks," ICBC Standard Bank analyst Tom Kendall said.

"The main reason feeds back into the fact the U.S. dollar is going to be travelling lower because the probability of an imminent U.S. rate increase has decreased and because the U.S. economy is not growing as strongly as people thought."

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

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.

Among other precious metals, silver was down 0.8 percent at $16.37 an ounce, platinum was up 0.1 percent to $993 and palladium was 0.8 percent lower at $551.25.

(Additional reporting by Clara Denina; editing by Louise Heavens and Adrian Croft)