Picture: REUTERS
Picture: REUTERS

LONDON — Gold turned lower on Tuesday as uncertainty before a Federal Reserve policy meeting and key US data later this week pulled the metal back from a one-week high hit on the back of violence in the Middle East and Ukraine.

The Fed kicks off a two-day meeting on Tuesday, with markets watching for clues as to when the US central bank will begin increasing interest rates. The bank will make a statement on Wednesday at the end of the meeting.

Gold is highly sensitive to any changes in US monetary policy. It rallied to record highs in the wake of the financial crisis after the Fed’s extraordinary stimulus measures drove down interest rates while stoking fears of inflation.

Spot gold was down 0.5% at $1,297.40 an ounce at 2.29pm GMT, having peaked at $1,312.10. US gold was down $5.20 at $1,298.10.

"The general tendency has been for gold to drop down below $1,300," Natixis analyst Bernard Dahdah said.

"What’s been keeping it up has been those (geopolitical) tensions. If you look at the economic data, or the dollar, which has strengthened quite a bit ... that should make investors feel more confident in the economic situation, and drive more money out of gold."

The dollar rose against a basket of currencies after data on Tuesday showed US consumer confidence jumped in July to a monthly high not seen since October 2007.

Gains in European shares remained capped, however, by the threat to the region’s economy from any more sanctions against Russia by the West.

Intense fighting between Ukrainian troops and pro-Russian rebels in eastern Ukraine killed at least 19 civilians, local officials said, as Kiev pressed an offensive to close in on the separatists.

Geopolitical tensions underpin gold

Meanwhile Israel knocked out Gaza’s only power plant, flattened the home of its Islamist political leader and pounded dozens of other high-profile targets, with no end in sight to more than three weeks of conflict.

"I’m actually surprised that gold isn’t up more, given the numerous geopolitical risks," Commerzbank analyst Daniel Briesemann said. "We’ve had some relatively good economic data published of late, and we’re currently seeing a stronger dollar.

That is keeping the price in check." In the physical markets, demand was subdued as buyers waited on the sidelines for a possible drop in prices. Premiums in top buyer China were steady at about $2-$3 an ounce.

Buying in Asia’s major gold consumers has shown signs of softening this year after a strong 2013, with China’s net overseas purchases of gold through key conduit Hong Kong falling to a 17-month low in June.

"Indicators of Chinese gold demand are mostly pointing lower so far this year," UBS said on Tuesday. "Some investors are likely questioning whether or not this softness is cause for concern and indeed if the positive trend in gold appetite in China over the last several years is starting to turn."

The bank added, "The reality is that year-on-year comparisons can be quite misleading, considering the exceptional amount of physical demand last year." Among other precious metals, silver was down 0.3% at $20.51 an ounce. Spot platinum was down 0.3% at $1,477.99 an ounce, while spot palladium was up 0.1% at $880.47 an ounce.