Spot gold lifted off seven-week lows on Tuesday as the euro recovered modestly and equities steadied, but all gains looked vulnerable on the threat of possible credit rating downgrades for euro zone nations.
Spot gold lost 0.1 percent to $1,663.14 an ounce by 14:26 SA time after posting its biggest one-day drop in nearly three months in the previous session. It touched $1,650.89 earlier, its lowest since Oct. 25.
US gold was off 0.04 percent at $1,667.60.
The euro recovered from a two-month low versus the dollar, and European stocks were steady after sharp sell-offs on disappointment about last week's “last ditch” EU summit to come up with a clear plan to tackle the single bloc's debt crisis.
Short-covering helped the euro rebound modestly, but traders said there was a clear bias to sell the single currency on any bounce. A weaker euro makes gold priced in the US dollar less affordable for holders of the single currency.
“I suspect that the euro will remain under pressure,” said Citi analyst David Wilson.
“If we do get any sovereign downgrades this week, I suspect the euro will be under even more pressure. It's difficult to see short term what's going to lift gold.”
Investors will closely watch for moves by the ratings agencies. Moody's Investors Service said on Monday it intended to review the ratings of all 27 members of the European Union in the first quarter of 2012 after EU leaders offered “few new measures” to resolve the crisis in a summit on Friday.
Standard & Poor's last week warned of a possible downgrade of 15 euro zone nations. Italian and Spanish bond sales later this week also are likely to provide a barometer of market sentiment.
“It's all about anxiety and worry,” said Nick Trevethan, senior commodities strategist at ANZ in Singapore. “Gold is just getting lumped in with other markets as risky assets, not necessarily for the right reason.”
Wild swings in gold prices since August have tarnished its reputation as a safe haven, and bullion has moved in tandem with riskier assets in the past few months.
“The bigger macro issues are still there, which would generally be supportive for gold, but right now it's all about the noise around the continued political failure in Europe,” Wilson said.
PHYSICAL BUYING PICKS UP
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, reported that its holdings dropped 0.605 tonnes to 1,294.796 tonnes by December 12, the lowest in three weeks.
Physical buying picked up in Asia after the sharp decline in prices, but many were hesitant to buy in bulk ahead of the year-end, especially while market sentiment remains fragile on concerns about Europe's troubles, dealers said.
“We expect physical demand to return in some strength on approach of $1,650,” Standard Bank analyst Walter de Wet wrote in a note to clients.
Key support for the metal lay at its 200-day moving average at $1,617, he said.
“Since early 2009, gold has consistently bounced off its 200d MA. Unless funding issues in Europe deteriorate substantially from current levels, we expect this support to hold,” he said.
Spot platinum rose 0.8 percent to $1,479.53 an ounce, off a seven-week low of $1,476.23 hit in the previous session. - Reuters