Gold edged up on Thursday, after shedding nearly 2 percent the day before and was set for its worst weekly performance in three months, as growing investor optimism on the outlook for the US economy boosted the dollar and riskier assets like stocks.
Investors have stuck with gold for now, pushing holdings of the metal in the world's largest exchange-traded products (ETPs) to record highs this week, while in Asia's purchasing hot-spots, the drop in price encouraged a strong revival in demand, particularly in top consumer India.
The sharp rise in US Treasury yields this week has also tempered gold, because of the knock-on effect on the dollar, which tends to gain in a rising rate-environment.
Ten-year Treasury yields were set for their largest weekly rise since early July 2011 this week.
Spot gold rose 0.4 percent to $1,648.56 an ounce by 1200 GMT, having lost nearly 4 percent so far this week, after the Federal Reserve issued a more upbeat outlook for the US economy, which doused market expectations for further use of additional policy measures to keep US rates low.
US gold futures for April delivery were up 0.3 percent at $1,648.90 an ounce.
“This has been another excuse for people who have been sitting on long positions from early January and even going back to early autumn, when there was speculation over when we would have QE and abundant liquidity,” Andrey Kryuchenkov, an analyst at VTB Capital said, of the Fed's programme of bond buying, or quantitative easing, to anchor short-term interest rates.
“But we will have negative real negative interest rates through 2014, the Fed reiterated that so essentially, I feel gold is well supported,” he said, adding that the negative correlation of gold to the US dollar would pose a stiff headwind to the bullion price.
SPDR OPTIONS FOCUS
In focus on Friday was the weekly expiry of options on shares of the SPDR Gold Trust, the world's largest physically backed gold ETP.
Data from the Options Price Reporting Authority BBO shows most open interest lies at 160.0 puts, options that would give the holder the right, but not the obligation, to sell SPDR gold shares at a price of 160.0 by expiry on Friday, which is equivalent to a spot gold price of $1,647.00 an ounce.
Shares in the trust were indicated at 160.1 by 1030 GMT, meaning those put options would be unprofitable should the spot gold price recover significantly from current levels by the time expiry rolls around, but would be in the money if the spot gold price falls much more.
Gold has fallen around 8 percent since late February as funds appeared to have closed out of their bullish bets on worries the Fed has no intention to buy any more major assets to keep interest rates and borrowing costs low.
The dollar rallied to an 11-month high against the yen and a one-month peak against the euro on Thursday on growing optimism about a US economic recovery and subsequent rises in US bond yields.
In theory, a firmer dollar hurts dollar-based commodities such as gold, as well as industrial metals such as copper, which is weighed down by concerns about slowing demand from China, the world's largest consumer.
“Sentiment is of course very bad. After slipping below $1,650, prices may go down further to $1,600,” said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, adding that a rebound will be capped at between $1,675 and $1,680.
“Safe-haven (appeal) is forgotten for the time being. The demand is sluggish because of the strong dollar. Speculators dumped their gold,” he said.
But a Reuters poll found developed economies will pick up steam this year due to an array of ultra-loose monetary policies from major central banks and amid new signs of progress in the euro zone's debt crisis.
Some jewellers in Hong Kong returned to the physical market, but bullion holders in other parts of Asia shifted their money into equities after strong US economic data and accommodative monetary policies by global central banks sent investors back into risk assets.
In India, local dealers reported a significant improvement in demand over the last two trading days, as the gold price has fallen below $1,700 an ounce.
In other precious metals, silver was up 0.7 percent on the day at $32.32 an ounce, having neared two-month lows on Wednesday on the US futures market, where prices fell by as much as 6 percent at one point in the day, closing 4 percent down.
Platinum edged up 0.2 percent to $1,673.74 an ounce, pushing the premium to gold to nearly $30 an ounce. Palladium was down 0.5 percent at $692.05 an ounce. - Reuters