Capital Gold Group Report: Gold treads water ahead of Fed rate decision

03.18.08, 11:33 AM ET LONDON (Thomson Financial) - Gold continued to tread water midafternoon as investors stuck to the sidelines ahead of the rate-setting meeting of the Federal Open Market Committee later today.

The FOMC is widely expected to cut rates by up to a percentage point at the talks, which could send the dollar still lower against the major currencies. A softer greenback boosts gold's appeal as an alternative investment, and could send prices higher.

'Precious metals markets stabilized somewhat overnight and were confined to a fairly narrow range as anticipation was building ahead of today's Fed meeting,' said Kitco Bullion Dealers analyst Jon Nadler. 'The coming rate cut should still provide fuel for tests to higher levels.'

At 3.02 pm, spot gold was trading at $1,005.90 per ounce against $1,002 in late New York trade yesterday.

Weakness in the dollar and fears over rising inflation, against which bullion is typically bought as a hedge, are currently keeping the yellow metal well-supported.

But analysts warn while investment demand remains strong, the physical side of the market, represented by buying from jewellers and other consumers, has been significantly dampened by higher prices.

According to figures released by the Bombay Bullion Association today, gold imports into India, the precious metal's biggest consumer, fell to 10 tonnes in February from 59 tonnes a year ago, analysts said.

'With prices showing no signs of cooling, March is not expected to be any better as physical buyers are not comfortable buying the yellow metal at such high prices,' said Nadler.

Meanwhile, silver was trading virtually flat at $20.14 per ounce against $20.24. Yesterday morning, it hit a 27-year high of $21.36, encouraged by gains in gold, before easing back in later trade.

Among other precious metals, platinum was trading slightly firmer at $1,988 per ounce against $1,972 after South African state power utility Eskom said it may be forced to declare force majeure over its electricity supply to South Africa's industrial users.

An electricity shortage in the country, which supplies almost 80 pct of the world's platinum, pushed the white metal to new record highs ealier this year and could crimp supply for years to come.

Sister metal palladium was slightly firmer at $477 per ounce against $472.

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