Gold rose on Wednesday as the euro hit a session high versus the dollar on reports that the IMF is planning to boost its lending resources, but weakness in stock markets ahead of fresh talks on Greek debt capped the metal's gains below $1,660 an ounce.
Spot gold was up 0.3 percent at $1,655.84 an ounce at 12:59 SA time, while US gold futures for February delivery were up $1.10 an ounce at $1,656.70.
The euro climbed 0.7 percent, recovering early losses after a media report said the IMF is proposing to increase lending resources by $1 trillion.
The broader financial markets retained a cautious tone, however, as traders awaited the outcome of talks between Greece and its creditors, which Athens hopes will help slash the country's debt and stave off default.
“While in the short term, gold may have further upside, failure of Greece and its private creditors to reach an agreement in the coming days could derail the upward trend,” said BNP Paribas analyst Anne-Laure Tremblay.
Gold has risen 5.9 percent so far this year, but has struggled to maintain upward momentum after confidence in the metal was battered by a 10 percent price fall last month.
The metal has managed to climb this year even at times when the euro has softened, but its strength relative to the dollar has tended to have a positive effect on the metal.
Stock markets were weak and safe-haven German bund futures rose ahead of the Greece talks, while Portugal, whose bonds have come under heavy pressure since Standard & Poor's cut its credit rating to junk on Friday, geared up for the sale of 2.5 billion euros of treasury bills later on Wednesday.
“Corrective gains in EUR-USD could continue as there are large short positions in the euro and further gains may result in a sharp short covering euro rally,” HSBC said in a note.
“This would likely support gold. But... beyond a near-term rally, slow progress on the euro zone debt crisis may keep the market negative on the euro and limit euro gains. We believe this could present headwinds to any further gold rallies.”
INDIAN ARDOUR FOR GOLD COOLS
China's gold purchases slowed down ahead of the Lunar New Year holiday, while India's bullion traders held off placing fresh orders after a hike in gold import duty was announced earlier this week.
India's government raised gold import duty to 2 percent of value from the previous flat rate of 300 rupees per 10 grams.
UBS said in a note that while the impact of the hike would probably be muted in the short term, “the reaction to this new floating tax rate is likely to be delayed”.
“The full impact will be observed once internal stocks (with the old import tax) become depleted and new consignments are shipped in,” it said.
On the supply side of the market, the world's number four gold miner, Gold Fields, said its fourth-quarter production was down nearly 2 percent, and full-year output was down at 3.49 million ounces.
Meanwhile, African Barrick Gold, a unit of the world's largest producer Barrick Gold, reported an 11 percent fall in fourth-quarter output after power outages at its Buzwagi mine, resulting in a 2 percent decline in full-year output.
Among other precious metals, silver was up 0.8 percent at $30.30 an ounce. The world's largest primary silver producer, Fresnillo, beat its annual output target and said it expected stable silver production in 2012, as a boost from new mines offsets lower ore grades at its flagship operation.
Silver prices fell sharply last year from a record near $50 an ounce it hit in April and underperformed gold in the full year, falling 10 percent against gold's 10 percent rise. Its ratio to gold is currently at 54.9, up from 31.7 in April.
Spot platinum was down 0.5 percent at $1,511.99 an ounce, while spot palladium was down 0.4 percent at $646.72 an ounce. - Reuters