Gold rose above $1,700 to its highest level in more than a week on Monday, helped by a strong euro and gains in equity markets, and hopes Europe will unveil fresh measures to tackle the region's growing debt crisis.
Gold held on to gains even after the International Monetary Fund said it was not in discussions with Italian authorities on a financing plan, dousing speculation that it was preparing an aid package.
Spot gold rose 2 percent to $1,712.53 a troy ounce at 12:42 SA time, from $1,679.15 late in New York on Friday, having earlier risen to a one-week high at $1,718.48 an ounce.
Reflecting an improvement in investor sentiment, European shares gained, while the euro gained against the dollar. A weak dollar makes commodities priced in the US unit cheaper for holders of other currencies.
Although gold is regarded as a safe haven asset to shield investors in times of uncertainty, it has increasingly become prone to pressure from selling in the wider financial market, moving in tandem with other assets as investor sentiment remains fragile.
“What appears to be going on is that there are clear moves within Europe and a recognition that some sort of closer fiscal integration is necessary. Quite how you get to it from where we are now, I think remains very difficult,” said Nic Brown, analyst at Natixis. Investors are likely to closely watch a meeting by euro zone ministers on Tuesday, with detailed operational rules for the region's bailout fund, the European Financial Stability Facility (EFSF), ready for approval. The approval would pave the way for the 440 billion euro facility to draw cash from investors.
US gold rose 1.7 percent to $1,713.80 an ounce.
With the US closed for Thanksgiving last Thursday, there has been no movement in ETF flows as of Friday. Last week, global holdings of gold rose by 300,500 ounces to a record 69.978 million ounces, led by inflows into SPDR, ETFS' ex-US funds and COMEX Gold Trust.
“We think broadly speaking it's demand from developing countries like India and China and in particular demand from developing countries' central banks that still hold very little gold as a proportion of their overall foreign exchange reserves,” Brown added.
LIMITED UPSIDE
Analysts warned that gains in the precious metal could be shortlived, with concerns about the implications of the region's growing debt crisis likely to keep investors cautious.
Moody's Investors Service warned on Monday the rapid escalation of the euro zone sovereign and banking crisis was threatening the credit standing of all European government bonds.
Focus will be on bond auctions by Belgium, which is looking to raise one to two billion euros at considerably higher costs after Standard & Poor's cut the country's credit rating late on Friday.
“We see limited upside potential for gold in the short term,” Commerzbank analysts said in a note.
“As Belgium's rating downgrade... shows, the sovereign debt crisis in the eurozone is spreading to more and more countries so a renewed increase in risk aversion and thus forced selling on the futures market is possible at any time.”
Gold, which hit a record $1,920.30 in September, is up more than 20 percent in the year-to-date, and is trading flat so far in November.
Spot silver tracked gold to rise 3.5 percent to $32.09. Spot platinum rose 1.9 percent to $28.78 an ounce, while spot palladium rose 5 percent to $590.22 an ounce. - Reuters