Gold eased below $1,620 an ounce on Monday, taking its cue from a weaker euro ahead of key central bank meetings this week, with speculation rife that the European Central Bank (ECB) will take fresh measures to combat the euro zone debt crisis.
The precious metal climbed 2.5 percent last week, its best weekly performance in eight weeks, as ECB president Mario Draghi's pledge to do whatever necessary to prop up the euro lifted the single currency and, consequently, gold.
Caution ahead of the central bank's meeting on Thursday, which will be watched for signs that Draghi's pledge will be backed with action, has since pulled the metal off its highs, though it remains supported just below $1,620 an ounce.
Spot gold was down 0.3 percent at $1,618.80 an ounce at 11:25 SA time, while US gold futures for August delivery were down 20 cents an ounce at $1,617.80.
“After the comments from Draghi, the ECB will have to deliver, otherwise it will end in catastrophe for the euro,” Quantitative Commodity Research consultant Peter Fertig said.
“If the ECB now delivers in cooperatig with the EFSF (European Financial Stability Facility), there is a really good chance that we will see gold and silver break out to the upside,” he added.
“We have several resistance points, with the crucial area at $1,670 to $1,700. If you take that out, there could be a strong move towards $1,790, the high we reached at the end of February.”
Gold stayed under pressure, however, as the euro eased 0.4 percent against the dollar, with traders taking profit on last week's gains because of growing expectations that the ECB will take action to tackle the euro zone debt crisis.
The metal has been held in check this year by the euro's losses and consequent gains in the dollar, which make assets priced in the US currency more expensive for other currency holders and curb the metal's appeal as an alternative holding.
However, better appetite for risk was reflected in the wider financial markets, with European shares extending early gains to four-month highs and German Bund futures staying close to three-week lows on expectations that the ECB could be preparing bold measures to cut high Italian and Spanish borrowing costs.
Euro-priced gold, which has outperformed dollar gold this year, was up 0.1 percent at 1,318.93 euros an ounce.
PHYSICAL DEMAND STILL SOFT
While the wider markets set gold's direction, underlying demand for the metal remained soft. Buying in major consumer India was lacklustre, with high prices, exacerbated by weakness in the rupee, keeping local buyers on the sidelines.
The world's biggest gold-backed exchange-traded fund (ETF), New York's SPDR Gold Trust, reported a fifth consecutive outflow from its holdings on Friday, its longest such run of losses in about 18 months.
ETFs, which issue securities backed by physical metal, have proved a popular investment behicle in recent years.
Meanwhile, hedge funds and money managers trimmed their net long position by about 25 percent in US gold futures and options in the week to July 24, as slumping bullion prices prompted investors to reduce their bullish bets.
“Right now, it's clear that sentiment is clearly turning in gold's favour,” UBS said in a note. “But it's also clear that despite last week's inflow of fresh longs, some hesitancy abounds.
“A much bigger pool of investors, while starting to pay attention to gold again, are biding their time before getting long. Investors are playing the waiting game, looking for the signal to get back in.”
UBS said that the signal for most investors would be US quantitative easing (QE). Further monetary easing would maintain pressure on long-term interest rates, keeping the opportunity cost of holding gold at rock bottom as well as weighing on the dollar, which would stoke demand for the metal as an alternative store of value.
A meeting of the Federal Reserve this week will also be watched, but few expect concrete clues on QE this time around.
Among other precious metals, silver was down 0.4 percent at $27.59 an ounce, while spot platinum was down 0.6 percent at $1,394.80 an ounce and spot palladium was down 0.8 percent at $567.48 an ounce. - Reuters