Gold at near three-week high as Fed rate decision weighs on equities

By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold rose to a near three-week high on Friday as the Federal Reserve's decision to leave U.S. interest rates unchanged rattled investors' outlook on the global economy and weighed on equity markets in developed economies.

Spot gold (XAU=) was up 0.5 percent at $1,137.34 an ounce at 2:49 p.m. (1849 GMT), after earlier touching its highest level since Sept. 2, at $1,141.50. Gold was on track to finish the week up around 2.7 percent, snapping a three-week losing streak.

The Fed kept interest rates unchanged on Thursday in a bow to worries about the global economy, financial market volatility and sluggish inflation at home. It left open the possibility of modest rate rises later this year.

"More supportive is the perception that the Fed seems to have lost a little confidence itself in the rate hike cycle," said Macquarie analyst Matthew Turner. "But we still think there will be a hike in December and therefore rallies are going to be capped."

A majority of Wall Street's top banks now expect the Fed to begin increasing rates in December, according to a Reuters poll conducted on Thursday after the Fed's policy decision.

"The later the Fed starts hiking, the more the weakness in gold prices will be shifted towards next year," said Georgette Boele, an ABN Amro analyst. "We are negative about gold mainly because we expect lower demand from investors."

The Fed also forecast that inflation would creep only slowly toward its 2 percent target, which could be seen as a negative for gold, often bought as an inflation hedge.

The dollar (.DXY) slumped to a three-week low against a basket of major currencies before later turning higher, while bonds rose, pushing yields sharply lower. [MKTS/GLOB]

"The Fed's hesitancy may yet reinforce investors' worries about the health of the global economy, rather than reassure them, leaving gold as one of the few lasting beneficiaries," Capital Economics said in a note.

On the physical side, gold discounts in India, the world's second-biggest consumer, widened this week as dealers struggled to offload stocks amid sluggish demand.

Chinese premiums held steady at $5-$6 despite the overnight jump in prices.

Silver (XAG=) was flat at $15.12 an ounce.

The longer-term outlook for the metal remains bearish, Julius Baer analyst Carsten Menke said in a note, due to its dependence on gold's movements and investment demand.

Platinum (XPT=) fell 0.5 percent to $975.75 and palladium (XPD=) was down 0.2 percent at $606.50.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Goodman, William Hardy and Leslie Adler)