Gold prices climbed for their eighth consecutive session Tuesday, as the Fed’s two-day meeting kicked off and investors weighed up the possibility of further injections of stimulation into the U.S. economy. Despite dipping towards the beginning of the session, the precious commodity pared initial losses to rise to $1,630.55 by 10.03 GMT, just off an intraday high of 1,632.90.

“We saw gold prices plunging during the opening session as investors moved into risky assets buoyed by a sigh of relief concerning the Greek vote”, Simon Denham (pictured) of Capital Spreads told this site. “But that did not last long as uncertainty regarding the rest of the struggling euro zone members brought buyers back into the market.  So gold prices pared their initial losses closing rather flat at $1627.55 and could stay supported ahead of the Fed meeting, due later this week.”

Despite an initial market rally, investors were lured back to the yellow brick after Greece’s election results ended up raising more concern than relief. Spanish government yields also fell after a sale of short-dated bills generated decent demand, but borrowing costs remained in the danger zone with investors nervous ahead of yet another auction this Thursday.

Gold bugs on the lookout

Despite the strength of the USD as a sanctuary for nervous investors in recent weeks, analysts at some of the world’s top forex brokers have begun to suggest that the gold is starting to display familiar safe haven characteristics. “Ahead of the FOMC meeting, gold bugs will watch for signs of more quantitative easing or an extension of Operation Twist when it ends this month,” said Lynette Tan, an analyst with Phillip Futures in Singapore.

“A failure to confirm more asset purchase or the like could see gold dropping again. For the moment, we expect policy decisions from the Fed to influence gold price more than risk appetite linked to the euro crisis.”

The current mood amongst top forex analysts, brokers and traders is that the Fed will engage in a further round of easing. But questions remain about the shape that this intervention will take, and its likely impact on the market. “Everybody is very skittish going forward about what the direction of gold is going to be," said Anthony Neglia, president of Tower Trading and a COMEX gold options floor trader in New York. An extension of the Fed’s so-called Operation Twist is unlikely to impact greatly on a market which is already pricing in the possibility of more aggressive measures.

Easing on the horizon?

The U.S.’ previous injection of easing saw the Fed purchase billions of dollars’ worth of assets between 2007 and 2010 in a bid to weaken the dollar. The move served to boost investment and consumption, whilst pushing yields on bonds and Treasuries down; but current reserved forecasts for U.S inflation are calling the need for such extreme measures into question.

Gold jumped to its highest level in 2012 around $1,790 in February after the Fed at the time said it would keep interest rates near zero until at least the end of 2014. But prices have shed about 9 percent since then on no signs of further easing.

When combined with recent sluggish US data, figures released earlier today – which showed US housing starts down by 4.8% in May – have fuelled expectation that the Fed will engage in a further round of easing. Previous reports showed that hiring has eased every month since February, while manufacturing output contracted last month.

Sarah Cox. Markets Writer, ForexSpace.com