Economic risks buoy gold above $2000 ahead of Fed verdict

The Fed's rate decision is expected with the likelihood of a 25-basis-point rate hike pegged at 86%

Gold firmed well above the $2,000 level on Wednesday, buoyed by uncertainty surrounding the US debt ceiling and other economic headwinds, while investors positioned for the US Federal Reserve's monetary policy decision.

Spot gold was flat at $2,016.28 per ounce by 0852 GMT after rising more than 1 per cent on Tuesday. It was trading in a narrow $7.01 range.

US gold futures rose 0.1 per cent to $2,025.10.

The Fed's rate decision is expected at 1800 GMT, with the likelihood of a 25-basis-point rate hike pegged at 86 per cent.

Read | Markets take a breather after 8-day rally; all eyes on US Fed interest rate decision

The central bank is also expected to signal a pause in its 14-month tightening cycle, as policymakers balance the need to slow inflation against risks ranging from bank failures to the possibility of a US debt default as soon as next month.

Gold is caught between growing anxiety over the US banking crisis, which has fuelled demand for safe-haven assets, and uncertainty over the Fed's stance, which is capping the upside, ActivTrades senior analyst Ricardo Evangelista said.

Bullion, known as a hedge against inflation and economic turbulence, gained over 1 per cent in April amid the banking crisis. But higher rates tend to dent the zero-yield asset's appeal.

"If the Fed were to surprise with a pause, this would suggest a deepening banking crisis and would likely send gold higher," said Clifford Bennett, chief economist at ACY Securities.

Data on Tuesday showed US job openings dropped in March and layoffs increased to the highest level in more than two years, suggesting some softening in the labour market.

Difficulties surrounding a bipartisan agreement over the debt ceiling has the potential to offer further support to gold, Evangelista added.

Spot silver fell 0.3 per cent to $25.32 per ounce, while rose 0.4 per cent to $1,069.98.

Palladium added 0.2 per cent to $1,431.73.

Analysts have cut their forecasts for palladium after a 60 per cent price fall, but rising vehicle production should limit any sell-off, a Reuters poll showed.