International gold prices fell slightly on Tuesday as fears that the Fed would accelerate policy tightening offset safe-haven demand fuelled by escalating tensions in Ukraine. Investors are watching the Fed's two-day policy meeting, which begins later in the day.
Spot gold fell 0.07 per cent to $1841.78 / oz at 14 / oz Beijing time; the main COMEX gold contract rose 0.01 per cent to $1844.4 / oz; and the dollar index rose 0.08 per cent to 95.994.
Michael Langford, director of corporate consultancy AirGuide, said the key factors affecting gold prices were risk aversion caused by tensions, a rise in bond yields as a result of the Fed's downsizing of expectations and a reduction in net long positions by hedge funds.
"the market does not know how the potential conflict in Ukraine will affect global markets," Langford said. "there is a lot of speculation and (I) expect gold prices to remain volatile in the short term."
NATO said on Monday that it was putting troops on standby and sending more warships and fighter jets to strengthen the military forces in Eastern Europe, which would be deployed to Europe at any time in the event of a Russian invasion of Ukraine.
Russia has condemned the West's "hysterical" response to the build-up of Russian troops on the Ukrainian border. The Kremlin accused the United States and its allies of escalating tensions by announcing plans to send more NATO troops to Eastern Europe and evacuating the families of American diplomats in Ukraine.
Russia has denied plans to invade, but has amassed about 100000 soldiers in the north, east and south of the Russian-Ukrainian border. Russia wants to redraw the European security map and hopes that NATO will never accept Ukraine and withdraw its troops and weapons from the former Warsaw Pact countries that joined NATO after the Cold War.
Investors are watching the Fed's two-day policy meeting, which begins later today, and is expected to signal that it plans to raise interest rates by 25 basis points in March. Gold is generally seen as a hedge against inflation but is highly sensitive to rising US interest rates because it increases the opportunity cost of holding unyielding gold.
The Fed may not raise interest rates until March, but the tough language of Fed officials on inflation has begun to play a role, with borrowing costs rising for everyone from home buyers to the federal government, and the stock market has started the year with a slump.
"the direction of gold prices may depend more on recent inflation and some doubts about whether inflation is likely to normalize significantly in the long run, as the market suggests," J.P.Morgan analysts said in a report.
