Jerritt Canyon project
Jerritt Canyon project Yukon-Nevada Gold

(REUTERS) -- Gold fell to its lowest since mid-January on Wednesday after a modest upgrade of the U.S. Federal Reserve's economic outlook added zip to the dollar and gave investors an excuse to lighten holdings of bullion.

The Fed gave few clues on prospects for further monetary easing on Tuesday but offered a slightly brighter economic outlook, backed by a report that showed retail sales posting their largest gain in five months in February.

Spot gold fell more than 2 percent to $1,642.30 per ounce by 1324 GMT, having hit a low of $1,640.30 - its lowest since January 16. U.S. April gold shed 3 percent to $1,642.70 per ounce. Silver was influenced by gold, falling 1.8 percent.

The fall in gold reflects removal of the premium attached to further quantitative easing, with prices giving up almost all of the gains made since January 25 when the Fed signaled the potential for additional policy stimulus.

We saw the 10-year (U.S.) government bond yield breaking out of the holding pattern it's been trading in for the last five or six months. That's one of the precursors to a change in rate sentiment, Saxo Bank senior manager Ole Hansen said.

Knowing how dovish the Fed - especially Bernanke - is, for him to say we're seeing growth is surprising. So removal of quantitative easing and a higher rates forecast is not good for gold in the near term, he added.

An ultra-low interest rate environment has been positive for gold as it takes focus away from its lack of yield.

The dollar rose broadly, hitting an 11-month high versus the yen, while U.S. government yields rose and European shares gained further traction.

Meanwhile, a slightly more optimistic economic outlook also spurred more investors to seek opportunities in other markets such as stocks.

Standard Bank analysts said however that gold was moving closer to good value, with underlying fundamentals expected to support prices.

As far as real interest rates are concerned, we believe that they will remain low for some time to come. The futures market agrees. Even the Fed has indicated that they will keep rates very low for some time, Standard Bank's Walter de Wet said.

This should keep real interest rates in negative territory. At the same time, economic conditions may indicate that the Fed funds rate is too low. Such a mismatch has in the past proved quite bullish for gold.

Slightly more robust industrial data was reflected in the performance of platinum and palladium due to their use in car production.

Platinum is enjoying a premium of around $30 to gold, with spot metal last at $1,678 per ounce, while palladium stood at $696 per ounce.

The potential for PGMs to outperform the complex is a reflection of the fact that a growth story would benefit industrials more than it would traditional safe havens, such as gold, UBS said in a note to clients.

But from a relative value perspective in the PGM space, flow data of late continues to support the view that palladium is slightly favored, it added.