Gold rose in Europe on Wednesday, recovering after its biggest one-day drop in nearly a month as the dollar retreated amid expectations the US Federal Reserve will maintain its accommodative monetary policy for now.

Spot gold was bid at $1,458.25 an ounce at 1116 GMT, against $1,453.95 late in New York on Tuesday. US gold futures for June delivery rose $4.90 an ounce to $1,458.50.

Gold fell below $1,445 an ounce on Tuesday as falling oil prices knocked commodities, but worries over unrest in North Africa and euro zone debt, plus expectations the Fed would lag other central banks in tightening monetary policy, lent support.

"At the moment, gold is where the money is being attracted to," said Peter Hillyard, an analyst at ANZ Bank.

"For every one of those factors, like the tightening coming and other non-friendly (factors) for commodities, there are many other commodity-friendly risks out there that make people very nervous."

The prospect that US authorities could rein in their accommodative monetary policy is a potential stumbling block for gold, which as a non-yielding asset has a higher opportunity cost when interest rates rise.

The metal has risen so far this year as rate rises in the euro zone, China and Australia benefited other currencies versus the dollar, but Fed policy is still being closely watched.

Dallas Fed President Richard Fisher said in an article published on Wednesday that the Federal Reserve risks employing a monetary policy that is too expansive and allows inflation to run out of control.

"The direction of US monetary policy is the key theme this quarter, and the uncertainty surrounding this includes both the timing of any tightening decision as well as its implementation," said UBS analyst Edel Tully in a note.

"This means that gold's movements in the coming weeks will be highly sensitive to the debates among Fed members."

"While any shift in rhetoric in favour of the hawks would likely push gold notably lower in the short term, as long as the probability of further quantitative easing remains in investors' minds, gold will be well-supported on pullbacks," she said.
Investment demand for gold exchange-traded funds softened. Holdings of the largest, New York's SPDR Gold Trust, slipping by nearly a tonne on Tuesday.

Holdings of the largest silver ETF, the iShares Silver Trust , eased around 30 tonnes from a record on the same day, its biggest one-day outflow in about a month.

Hefty inflows into the fund this year have accompanied a sharp rise in silver prices, which peaked at 31-year highs of $41.93 earlier this week.

"Silver remains the best performer within the complex, consistent with our previous bullish short-term rating," said Standard Chartered in a weekly note.

"We still think a long silver position is a very risky trade, as the gold/silver ratio has dropped to its lowest level since 1983 and is now more than 40 percent below the average level of 60 in the last 12 years, but we have stuck to our short-term bullish call for now."

Silver was bid at $40.26 an ounce against $40.04.

Fresnillo, the world's largest primary silver producer, said output declined 2.2 percent to 10.1 million ounces in the first quarter due to lower ore grades.

Platinum was at $1,779.40 an ounce against $1,765.70, while palladium was at $767.80 against $761.40. – Reuters