Gold rallies amid weaker dollar, FOMC meeting in focus

Gold gained during early European trading as a weaker greenback supported dollar-denominated commodities. Market players are awaiting this weeks key U.S. data and news from the two-day FOMC meeting in order to gauge the U.S. economys recovery pace and possibly get a date for when deceleration of Feds Quantitative Easing program will start.

On the Comex division of the New York Mercantile Exchange, gold futures for December delivery traded at $1 325.35 per ounce at 8:13 GMT, up 0.26% on the day. Prices ranged between days high and low of $1 335.05 and $1 323.15 per troy ounce respectively. The precious metal fell 0.17% on Friday but still closed the week 2.93% higher after advancing almost 6% during the preceding two.

Gold edged higher on Monday as a weaker dollar supported raw materials. The greenback tends to trade inversely to the precious metal as weakening of the currency makes dollar-denominated commodities cheaper for foreign currency holders and boosts their appeal as an alternative investment. The dollar index for September settlement traded at 81.73 at 8:14 GMT, down 0.05% on the day. Prices held in range between 81.82 and 81.61, the lowest since June 19. The U.S. currency gauge slipped 0.15% on Friday and settled last week 1.17% lower, a third consecutive weekly decline, as mixed U.S. data weighed on the dollar.

Last week, gold was supported as overall controversial U.S. data dampened concern over an earlier-than-expected deceleration of Feds monetary stimulus, thus benefiting gold and other raw materials. The precious metal is mainly used as a hedge against inflation, which arises amid monetary easing programs, such as Feds Quantitative Easing. News that indicate deferring of the monetary stimuluss deceleration are supportive for gold.

The U.S. Labor Department said last week that during the week ending July 20, 343 000 people have filed for initial unemployment payments, 3 000 more than analysts predicted and 7 000 more than the preceding week. This offset the Commerce Departments report on Thursday that showed June’s Durable Goods Orders equaled 4.2%, surpassing expectations for a decrease to 1.4%. May’s reading was revised upwards to 5.2% from 3.6%. The Final University of Michigan Confidence also couldnt stop golds upward momentum, despite surging to a six-year high of 85.1, exceeding forecasts for a jump to 84.0 from June’s reading of 83.9

The precious metal fell to as much as $1 180 an ounce in the end of June, after which a rebound followed as Ben Bernanke announced that the Federal Reserve is still expected to scale back Quantitative Easing by the end of the year. However, currently the fragile U.S. economy still needs easy money supply as the labor market is not where the central bank wants it to be. Gold regained as much as 7.5% since the beginning of July, but is still poised to mark its first annual decline after gaining for 12 consecutive years.

Analysts at ANZ said in a note: “Fed Chairman Bernanke indicated at his semi-annual testimony that the central bank isn’t yet ready to start winding back its asset purchases. Our base case remains that the Fed will begin tapering its asset purchase program in September.”

Market players are looking ahead into this week’s two-day Fed policy meeting and key U.S. data to receive further information about when and with what pace the central bank’s monetary easing program will be tapered. Pending Home Sales are due on Monday, while Consumer Confidence report and S&P/Case-Shiller Composite-20 Home Price Index will be released on Tuesday. On Wednesday, well have preliminary unemployment data prior to Fridays Unemployment Rate. The ADP Employment Change is expected to remain flat at 188 000. Also on Wednesday, Personal Consumption Expenditures, Employment Cost Index and Chicago PMI will be released and the FOMC will announce its interest rate decision. On Thursday, Initial Jobless Claims are expected to have risen by 1 000 in the week ending July 27 and the ISM Manufacturing index should show improvement. On Friday, one of Feds main requirements to trim its monetary stimulus, the Unemployment Rate, is expected to have fallen to 7.5% in July, down from 7.6%. Also on Friday are due Personal Income, Personal Spending, Average Hourly Earnings and Factory Orders.