Gold rose in Europe on Wednesday, influenced by a firmer but volatile euro, with investors seeking clarity on prospects for a second Greek debt bailout and wider euro zone economic health.
Investors noted that bullion recently has not behaved typically as a safe-haven but has risen and fallen in tune with the euro, stock markets and other so-called risk assets.
The single currency was firmer on the day after earlier hitting a nine-day low against the dollar after euro zone officials said a proposal was being considered to delay all or part of a Greek bailout.
“The correlation between gold in the short term and some of the risk markets is higher than people probably expect,” said Pau Morilla-Giner, head of equities, commodities & alternative investments at London and Capital Asset Management.
“Below the surface ... gold continues to trade about 60 to 70 percent of the time as an alternative currency, which clearly has to do with being a better store of value than nominal currencies that are being abused by excessive quantitative easing (QE) across the board,” he added.
Spot gold was quoted at $1,730.39 per ounce, up 0.7 percent on the day. Benchmark COMEX gold futures stood at $1,733.40, up $15.70.
The metal has gained about 10 percent in the year to date.
Data released earlier showed the euro zone economy had shrunk by 0.3 percent in the last three months of 2011, with the sovereign debt crisis crushing a recovery, but a north-south divide was evident as France grew while Italy slumped.
Mitsubishi analyst Matthew Turner noted that a scenario in which Greece leaves the euro area would be uncharted territory, and that for gold to make further gains, an improvement in the overall economic backdrop would need specific characteristics.
“It was the case last year that gold didn't do very well on bad news that was deflationary, whereas it does do well on bad economic news that is inflationary,” Turner said.
“Gold might struggle a little bit if things do get better, but I'm skeptical that they will get much better. I think perhaps we'll see a slowdown in the economy again in Q2, Q3 and that might start to raise hopes of more QE.”
Injecting cash into the economy with quantitative easing is gold-friendly as it supports ultra low interest rates.
Technical analysis suggested spot gold could fall to $1,698 an ounce during the day.
Hedge fund manager and long-time gold bull John Paulson cut his gold ETF bullion holdings by about $600 million in the fourth quarter, a second straight reduction that was probably driven by client redemption needs as he remained upbeat on the metal.
However, Paulson's selling in the SPDR Gold Trust was more than offset by buying by other investors, reflecting long-term confidence in gold.
Spot platinum rebounded after hitting a one-week low of $1,615.98 in the previous session, rising 0.7 percent to $1,635.49.
Silver mimicked the firmer tone in gold and other metals, rising 0.9 percent to $33.85 per ounce. - Reuters