NEW YORK (MarketWatch) -- Gold futures climbed about 1% on Wednesday on expectations the Federal Reserve will hold interest rates near zero and do little in the way of removing some of the massive amounts of money it injected into the economy in the last year.
The Fed's decision on rates and its accompanying statement will be released at 2.15 p.m. Eastern time.
"Continuing record low interest rates are the primary reason that gold has yet to reach the bubble phase," analysts at GoldCore said in a note. "In the 1970s, interest rates had to be increased to well into the double digits prior to the gold bubble bursting."
Gold for February delivery, the most active contract, was recently up $10, or 0.9%, $1,333.0 an ounce. The January contract was up $9.90, or 0.9%, at $1132.40 an ounce.
Gold held onto gains after the U.S. government reported its consumer price index rose 0.4% in November, matching economists' expectations. Core prices, excluding food and energy, were flat, while economists expected a slight increase.
Separately, housing starts rose to a 574,000 pace in November, stronger than the 563,000 pace expected by economists surveyed by MarketWatch.
On Tuesday, gold finished the session down 80 cents amid speculation that the Fed might either raise its discount rate or seek in its statement to draw a distinction between its traditional monetary policy, based on interest rates, and the extraordinary measures it took to boost liquidity.
But "the Fed is unlikely to alter any rates for 'optics' heading into banks' year-end, given the increased demand for liquidity," said Michael Gregory, an analyst at BMO Capital Markets, in a note.
Nevertheless, he said the Fed could refer to recent tests undergone to reverse some of its debt-purchasing operations to emphasize that it is "crafting its eventual exit strategy."
After slashing its key fed funds rate to near zero at the start of the year, the central bank took extraordinary steps to pump liquidity in the system, including massive purchases of debt and other assets.
This surge in liquidity, including a sharply weaker dollar, has led some analysts to believe that the rebound in commodities prices this year, including in gold, is just another asset bubble.
"Because the financial crisis forced the Federal Reserve to pour liquidity on financial markets, many fret, now that the economy seems to have turned upward, that an inflationary potential menaces," said Milton Ezrati, market strategist at Lord Abbett, in a note. "Their concerns have contributed to the dollar's recent weakness and certainly to the recent, dramatic rise in the price of gold."
After rallying on Tuesday, the dollar edged lower, boosting gold's appeal as a hard asset and a hedge against weaker currencies. The dollar index (DXY 76.70, -0.26, -0.33%) , which measures the U.S. unit against a basket of six major counterparts, was down 0.2% at 76.85.
Among other metals, silver for March delivery gained 24 cents, or 1.4%, to $17.69 an ounce. March palladium rose $9.95, or 2.7%, to $376 an ounce and January Platinum rose $8.90, or 0.6%, to $1,461.40 an ounce.
