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Gold 1130.50 - Recovering lost
ground as dollar wilts
Jan Harvey
LONDON
Wed Jan 13, 2010 9:34am EST

LONDON (Reuters) - Gold rose in Europe on Wednesday as the dollar weakened versus the euro, helping the precious metal recover some of the previous day's 2 percent loss, with physical demand emerging to support prices at the lows.

Gold dropped along with most commodities on Tuesday after China's decision to raise its banks' reserve requirements sparked fears spending will be curtailed. The dollar initially rose on the move, though it has since retreated versus the euro.

Spot gold was bid at $1,132.25 an ounce at 1412 GMT (9:12 a.m. EST), against $1,127.95 late in New York on Tuesday. U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange firmed $3.20 to $1,132.60 an ounce.

"This morning and last night, there were quite a few physical buyers bargain hunting around in the marketplace, and we saw some good demand out of India and elsewhere," said Afshin Nabavi, head of trading at MKS Finance.

"With the dollar back on the slide, there is more interest," he added. "I wouldn't be surprised if we pushed near to the high end of the range again, which is around $1,145-50."

The euro hit a one-month high against the dollar on Wednesday while higher-yielding currencies trimmed the previous day's losses as investors concluded China's surprise monetary tightening would not derail growth.

Strength in the U.S. unit curbs gold's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.

China's move may be a precursor to an interest rate rise, analysts said, which would hurt gold as a non-interest bearing asset.

"Bullion never behaves well in a rising interest rate environment across the globe," VTB Capital said in a note.

COMMODITIES PRESSURED

Among other commodities, oil prices fell to their lowest this year after an industry report showed rising U.S. distillate stocks, despite the cold snap that has brought snow and ice to the northern hemisphere.

Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.

Equities recovered after early losses on the China news, with European shares edging higher. U.S. stock futures rose on Wednesday.

Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, dipped another 3.7 tonnes on Tuesday, bringing their decline so far this year to nearly 18 tonnes, or 1.6 percent.

Silver tracked gold higher to $18.39 an ounce from $18.24. Platinum was at $1,570.50 an ounce against $1,568.50, and palladium was at $420 against $421.50.

U.S. platinum and palladium exchange-traded funds launched last Friday were met with buying interest, with about 170,000 ounces of metals added in the first two trading sessions, a spokesman for ETF Securities, which operates the funds, said.

"Continued strong ETF investment in 2010 (potentially amplified by the U.S. ETFs) would push the platinum and palladium markets into deficit," RBS Global Banking & Markets said in a note.

"This underpins our longer-term bullish outlook on the PGMs, our top pick being palladium."

(Editing by Sue Thomas)

http://www.reuters.com/article/idUSTRE5B10OV20100113