Gold climbs toward 18-month high; eyes on Fed

LONDON (Reuters) - Gold climbed 1.5 percent to trade within striking distance of recent 18-month highs on Tuesday, supported by a broadly weaker dollar, as investors focused on the U.S. Federal Reserve meeting on interest rates.

Spot gold rose as high as $1,019.50 an ounce and was at $1,015.85 by 1506 GMT, versus $1,002.55 an ounce late in New York on Monday, when it fell to $995.50, its lowest in almost a week.

Dealers and analysts said that while the market had picked up well, there was some hesitance to take full advantage of dollar weakness until the outcome of the Fed meeting on Wednesday.

Most are looking for signals that the central bank will keep its ultra-loose monetary policy well into 2010.

"The market is looking for any sense of a change in speed or direction from the (Fed). If we come past that press conference tomorrow and the market decides its business as usual...it's another green light to sell the dollar and another up-leg for gold," said Mitsubishi analyst Tom Kendall.

Further dollar weakness after the meeting could trigger a rally which could send bullion above its 18-month high of $1,023.85 an ounce hit last week, and to within sight of the $1,030.80 an ounce record high struck in March 2008.

But worries about liquidation of record long positioning on the New York COMEX futures market threatens the sustainability of prices, once a record high is reached.

"I'm bullish but I think we need a more substantial correction than the one we saw yesterday," said Afshin Nabavi, head of trading at MKS Finance.

The euro rose above $1.48 for the first time in a year as dealers took advantage of deteriorating sentiment toward the dollar to target options barriers at that level.

A weaker dollar makes dollar-priced gold more attractive for non-U.S. investors.

SPEC WEIGHT

Noncommercial net long positions in gold futures in New York at an all-time high of 235,647 lots for the week ended September15 worried investors as it could spark a long liquidation.

"We need to see the previous record high broken to let some steam out of this market. As long as we fail to get through that level there's always the risk that we could see long liquidation on disappointment," Hansen at Saxo Bank said.

U.S. gold futures for December delivery rose $11.70 an ounce to $1,016.60 on the COMEX division of the New York Mercantile Exchange.

Lower prices could attract buying from main consumer India, where weddings traditionally take place during the current festive season, which peaks in October with Diwali, the Hindu festival of lights.

"We need the physical market to come and obviously at these levels that market is very hesitant," Nabavi at MKS Finance said.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,101.735 tonnes as of Sept 21, up from 1,086.479 tonnes the previous day.

In other metals, silver rose to $17.18 an ounce compared with Monday's $16.80, while palladium was at $301.00 an ounce versus $294.50 an ounce. It hit $304 an ounce last week, its highest since end-August 2008.

Platinum was at $1,332.50 an ounce compared with $1,315.50 an ounce.

By Humeyra Pamuk