Jul 5, 2010
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Gold eases below $1,210 as risk aversion abates

Jul 5, 2010

Gold eased below $1,210 an ounce in Europe on Monday as the risk aversion that drove prices to record highs in June abated, with a firmer dollar and caution during the U.S. Independence Day holiday also weighing.

Spot gold was bid at $1,206.45 an ounce at 1533 GMT, against $1,210.60 late in New York on Friday. U.S. gold futures for August delivery eased 60 cents to $1,207.10 an ounce.

Gold fell 3.4 percent last week, retreating further from the record $1,264.90 it hit in June, as the extreme risk aversion linked to fears over sovereign debt issues in European countries such as Spain abated, removing haven demand for the metal.

Many analysts are predicting a soft summer for the metal, with physical demand seasonally weak and investment easing after a strong start to 2010. However, concerns over the outlook for the wider markets are set to support the metal longer term.

"Our sense is that the correction is temporary," said Michael Lewis, head of commodities research at Deutsche Bank.

"What you might see is that after July, when we are hoping the Spanish situation and the sovereign bank redemptions start tailing off, you could start to see the dollar weakening again."

The dollar firmed on Monday, up 0.25 percent against a basket of six other currencies and 0.3 percent versus the euro . Strength in the unit makes dollar-priced commodities more expensive for holders of other currencies.

A drop in holdings of the world's largest gold exchange traded fund, New York's SPDR Gold Trust , after relatively steady inflows throughout June also reflects weaker investment appetite for the metal, Commerzbank analyst Eugen Weinberg said.

The SPDR gold trust reported an outflow of a further 9,780 ounces on Friday, after a decline of just over 39,000 ounces in the previous session, its first dip since early June. Its holdings hit a record 1,320.436 tonnes that month.

"Most of these purchases were driven by fear, and fear seems to be leaving the market," Weinberg said. "People are not so afraid of data at the moment, and it appears measures by the European Central Bank are enough to hold the crisis.

"We think during the third quarter stagnation or even falling prices are possible," he added. "But in the fourth quarter, we again expect further price gains, and expect prices to reach new all-time highs, probably above $1,300."


On other markets, European share trading volume dwindled as the closure of Wall Street for Independence Day kept investors sidelined.

Oil prices gave up early gains to turn lower amid lingering concerns over demand, while base metals such as copper, zinc and lead gained ground after last week's drop.

Analysts reported some improvement in physical demand for gold as prices declined.

"Jewellery manufacturers are likely to buy fresh stocks on sharp price dips to lend further support to the market," Fairfax investment bank said in a note.

Buying of gold in the world's top bullion consumer, India, was pressured by a nationwide strike in the country over a fuel price hike, however.

Among other precious metals, silver was at $17.72 an ounce versus $17.80. Platinum was at $1,504.50 an ounce against $1,496.50 and palladium at $428.25 against $430.

"For now, $1,500 in platinum and $425 in palladium are acting as a 'home' for prices," said UBS analyst Edel Tully in a note. "At these levels, both metals are trading close to fundamental value."

She said much of the speculative element to the metals' price rise earlier in the year had now been removed.

"This will not insulate the metals from further downside pressure in coming months should concerns about global growth escalate, but the clearing out of the excessive speculative overhang should make them more resilient to the downside."

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