Gold ticks higher, awaiting Fed rate decision and 2017 view

By Eric Onstad

LONDON (Reuters) - Gold hovered at slightly firmer levels on Wednesday as investors kept to the sidelines, confident that the U.S. central bank would raise interest rates but unsure about what guidance it would give for next year.

Bullion was supported by a softer dollar ahead of a U.S. Federal Reserve announcement later on Wednesday that markets overwhelmingly expect to detail a quarter-point rate increase.

"Gold is in no-man's land today, waiting for more insight from the Federal Reserve," said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan.

"In theory the Fed might surprise on the hawkish side, but the dollar has risen to a level that already incorporates another two hikes. So it's pretty messy, the dollar is ruining the Fed's plan."

Spot gold was up 0.4 percent at $1,162.46 an ounce by 1500 GMT and U.S. gold futures added 0.5 percent to $1,165.

The Fed is due to release its latest policy and interest rate statement at 1900 GMT, with new forecasts assessing whether the economic outlook has changed since the presidential election.

Higher U.S. rates raise the opportunity cost of holding non-yielding bullion and normally weigh on gold, but markets have already priced in a December rise.

The dollar index, which measures the greenback against a basket of currencies, was down 0.2 percent, extending losses following U.S. data.

U.S. retail sales barely rose in November, suggesting some loss of momentum in economic growth in the fourth quarter, while U.S. industrial production fell more than expected.

"The market expects that maybe (Fed Chair Janet) Yellen's comments tonight on rate hike projections for the next year will not be too hawkish," said Helen Lau, an analyst at Argonaut Securities in Hong Kong.

"So that is the reason why the dollar has weakened a little bit, and that's what is supporting gold prices."

Meanwhile, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, are down more than 9 percent since November.

"People who invest in ETFs will have a relatively longer-term view, so the current rotation is rotate out of gold to risky assets, expecting that the U.S. economic situation will improve," Lau said.

Commerzbank said that physical gold demand was starting to rebound in India, which has been hit by a severe cash crunch.

"According to industry and trade sources, Indian jewellery manufacturers have recouped roughly half of the business they lost following the government's demonetisation," the bank said.

Silver was up 0.9 percent at $17.05 after falling nearly 1 percent in the previous session.

Platinum rose 1.3 percent to $944.20 while Palladium dipped by 0.3 percent to $727, having gained about 1 percent on Tuesday.

(Additional reporting by Swati Verma in Bengaluru; Editing by David Evans and David Goodman)