Gold price stopped short of $1,300 ahead of Fed

The gold price added to recent gains on Tuesday to reach a three-week high, but fell short of the crucial $1,300 an ounce level.

Gold futures were changing hands at $1,290 in late afternoon trade, after earlier hitting an intra-day high of $1,295, ahead of testimony by the US Federal Reserve Chairman Ben Bernanke in front of the US Congress on Wednesday.

Gold investors will be looking for clues from Bernanke about the future of the central bank's quantitative easing program.

Fears that the Fed may start to dial back its asset buying program that adds $85 billion of cheap money to financial market each month as soon as September, has effectively put a ceiling on the gold price as it attempts to recover from near 3-year lows hit late June.

The softness in the gold price comes despite surging demand in China as evidenced by the premium traders on the Shanghai Gold Exchange are willing to pay for the metal.

Before April's dramatic $200 fall to $1,400 over two trading days SGE premiums stayed below $10, but then shot up to more than $20. Gold's second gap down in late June to $1,200 following Bernanke's comments about QE saw Shanghai premiums top $30.

In a research note on Tuesday, South Africa's Standard Bank said the yellow metal could test $1,300 but it expects gold to encounter "strong resistance here ahead of COMEX option expiry next week. Besides this level providing psychologically resistance, recent trends indicate that physical demand from China eases above $1,300. Should physical demand remain strong, and gold manages to breach $1,300, we would look for resistance on approach of $1,310 — and thereafter, $1,340."

The Fed has been reviewing QE and is eager to throttle back asset purchases at the first signs of a solid economic recovery in the US or the emergence of inflation.

On Tuesday, US data showed inflation remained in check: the consumer price index rose by a seasonally adjusted 0.5% in June while core consumer prices climbed 0.2%.

The first QE program was announced by Bernanke in December 2008 when an ounce of gold cost $837.50 which means despite the sharp pullback in 2013, gold is up more than 50% under QE.

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