Gold flat but dollar drop, Bernanke view underpin

Gold was little changed on Wednesday as the market was underpinned by a dollar drop and Federal Reserve Chairman Ben Bernanke's comment that he had no plans to scrap a massive bond-buying program, indicating interest rates will not rise any time soon.

In testimony to Congress, Bernanke suggested U.S. economic conditions were still too weak for the central bank to pull back on its vast monetary stimulus, despite a welcome drop in the jobless rate.

"I saw the positives to gold in Bernanke's comments. It seems that he's going to maintain the QE2 policy in place, and that's a bullish argument for commodities," said Tom Pawlicki, a precious metals and energy analyst at MF Global.

In November, the Fed launched a plan to buy $600 billion in government debt to keep borrowing costs low to stimulate the economy, a process known as quantitative easing.

Gold was trying to restore upward momentum after gaining more than 4 percent in the past 10 days, and a rise in Chinese interest rates for the second time in just over six weeks benefited gold's status as an inflation hedge.

Spot gold slipped 0.1 percent to $1,362.04 an ounce by 3:02 p.m. EST.

U.S. gold futures for April delivery settled up $1.40 at $1,365.50. Trading volume nearly halved its 30-day average, in line with weaker turnover in the past several sessions.

Bullion buying increased as the dollar faltered against the euro and as U.S. bond yields fell after a seven-session winning streak following a solid auction of 10-year Treasury notes, traders said.

A run of well-received economic data in January had taken the wind out of gold's sails and increased speculation that a correction was due, pushing prices back toward $1,300 an ounce.

"A lot of speculative (investors) that had gone in at the end of last year clearly saw growth being reignited and they got scared," said London & Capital portfolio manager Pau Morilla Giner. "They thought that gold would lose its appeal."

"But the long-term money in gold is still there," he said. "The realization is that economic news has been better than expected because the stimulus that has been applied has been extraordinary."

Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, dipped to 1,228.56 tonnes on Tuesday from 1,228.864 tonnes the previous day, although the hefty outflows seen in January have apparently been staunched.

The SPDR fund experienced its second-biggest monthly outflow and the main silver ETF, the iShares Silver Trust, its biggest ever outflow last month, adding downward momentum to precious metal prices.