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Gold up around 3 percent as Fed sticks to stimulus

Gold bars are pictured at the GSA Austria ( Money Service Austria ) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger/Files

By Frank Tang and Clara Denina

NEW YORK/LONDON (Reuters) - Gold soared around 3 percent on Wednesday after the U.S. Federal Reserve said it would continue buying bonds at an $85 billion monthly pace for now, surprising financial markets that were braced for a reduction in the central bank's economic stimulus.

Citing strains in the economy from tight fiscal policy and higher mortgage rates, the Fed decided against the tapering of asset purchases that investors had all but priced into stock and bond markets.

"Gold is rallying as the Fed is not exiting its stimulus program. We are going to have cheap money and low interest rates for a long time," said Axel Merk, portfolio manager of California-based Merk Funds, which has around $500 million in currency mutual-fund assets.

After the Fed announcement, gold's gains far outpaced other markets, with the S&P 500 equities index (.SPX) around up 1 percent and the Thomson-Reuters CRB index (.CRB) also up nearly 1 percent.

The metal is a traditional hedge against inflation and economic uncertainty brought by central-bank actions.

Spot gold was up 2.9 percent to $1,446.74 an ounce by 2:18 p.m. EDT (1818 GMT). It rebounded about $45 or 3 percent from a six-week low at $1,291.34 earlier in the session.

U.S. Comex gold futures for December settled down $1.80 an ounce at $1,307.60 prior to the Fed statement, with trading volume at about 20 percent above its 30-day average, preliminary Reuters data showed.

Among other precious metals, silver rose 3.5 percent to $22.43 an ounce. Platinum was up 0.9 percent to $1,429.85 an ounce, while palladium dropped 0.4 percent to $700.35 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by William Hardy, James Jukwey and Marguerita Choy)