NEW YORK: Gold prices dropped on Wednesday, suffering their biggest two-day loss since the peak of the financial crisis, while the dollar rose as investors bet a speech by the Federal Reserve Chairman later this week will not reveal any major central bank initiatives.
World stocks edged higher as investors tried to build on positive sentiment after weeks of selling ahead of a key speech on Friday by Federal Reserve Chairman Ben Bernanke.
US equity markets were volatile, however, seesawing between gains and losses on investor skepticism that the Fed can offer any new policy prescriptions that can help the economy.
Markets were supported by better-than-expected US durable goods orders and after the US Congressional Budget Office predicted a decline in the US deficit in coming years as a result of the government's recent debt-reduction agreement.
That was enough to buoy sentiment in stocks as investors shifted away from safe plays like government bonds and precious metals.
Financial shares led the gains on the US benchmark Standard & Poor's 500 in its third day higher. Both world and US stocks rallied on Tuesday.
Investors are hoping for additional action from the US central bank because the US and euro zone economies appear in danger of sliding into recession.
The day's rise follows weeks of equity market turmoil, with benchmark stock indexes on track for their worst month since the fall of 2008, after the Lehman Brothers collapse.
A year ago, Bernanke told the market a second round of monetary support, or quantitative easing, was on the way. The announcement of QE2 led to a sharp rally in stocks last fall.
World stocks as measured by MSCI were up 0.7 percent on the day.
European shares were higher, though Japanese shares sold off following Moody's Investors Service's downgrade of the country's sovereign debt.
Tokyo's Nikkei average closed down more than 1 percent. Overseas investors in particular reacted negatively to the downgrade.
GOLD TUMBLES
Spot gold fell sharply for a second session, dropping more than 3 percent as rising equity markets prompted bullion investors to take profits after the metal's sharp rally.
Gold fell 2.8 percent to $1,777.69 an ounce, having hit a one-week low of $1,765.10. It was more than $100 below a record $1,911.46 an ounce hit in the previous session.
Adding support for stocks, US government data showed new orders for long-lasting US manufactured goods rose more than expected in July on strong demand for aircraft and motor vehicles.
"The durable goods data looked very decent, but we'll need a bigger catalyst to move higher," said Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio, which oversees $14.5 billion. "It would be nice to get one from Bernanke, but I don't think that's likely."
Speculation is widespread in financial markets that Bernanke will use his Friday speech at a central banker conference in Jackson Hole, Wyoming, to signal a new monetary offensive to support the faltering US economy.
However, many analysts think Bernanke is most likely to outline gradualist measures, which would disappoint those looking for a big bang approach such as a fresh round of bond buying, or QE3.
On Wall Street, the Dow Jones industrial average was up 18.62 points, or 0.17 percent, at 11,195.38. The Standard & Poor's 500 Index was up 1.86 points, or 0.16 percent, at 1,164.21. The Nasdaq Composite Index was down 6.11 points, or 0.25 percent, at 2,439.95.
Oil also gained on the speculation, with Brent October crude up 40 cents at $109.71 a barrel.
The dollar traded near a record low against the yen as traders shrugged off a program that urges firms to exchange yen for foreign assets, a development that left some on alert for more market intervention.
The dollar was last down 0.2 percent at 76.51 yen, close to an all-time low just beneath 76 yen
In bond markets, core euro zone sovereign bond prices fell. Some tension returned to the peripheral sector, with Greece's yield hitting a record 42 percent.
US Treasuries prices fell after the Congressional Budget Office predicted a decline in the US deficit in the coming years as a result of the government's recent debt-reduction agreement.
The benchmark 10-year Treasury note was last down 10/32 in price and yielding 2.19 percent, up from 2.16 percent late on Tuesday. ?Reuters
Copyright Reuters, 2011
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