Gold bounces late on Greek downgrade but ends down

A gold jewellery shop owner arranges ornaments at a counter in Kolkata May 27, 2010.

NEW YORK/LONDON (Reuters) - Gold settled lower on Monday but rebounded in late business to bounce above $1,220 an ounce, after another downgrade to Greece's credit rating reawakened fears about excessive debt levels in several euro zone countries.

"If anything, it just sort of continues to refresh those trends we have seen -- long dollar, long gold, short the European currencies," said Zachary Oxman, managing director with TrendMax Futures in Encinitas, California.

"Moody's coming out and reigniting the fire, so to speak, is just going to remind everybody that this is not over yet, and it's not getting any better right now. It is a reminder that there are still a lot of problems out there."

Spot gold was bid at $1,222.15 an ounce at 1;41 p.m. EDT, down from $1,225.40 late in New York on Friday. U.S. gold futures for August delivery cut losses by half, settling down $5.70 at $1,224.50.

The euro pared gains against the dollar after the downgrade, but remained up over 1 percent on the day as investor appetite for risk improved. The single currency recorded its biggest weekly gain since September last week. <FRX/>

A stronger euro, and consequently weaker dollar, would in normal circumstances benefit gold. But in recent months the relationship has inverted as bullion and the U.S. currency both benefit from mounting risk aversion.

"I think we will be stalling here amid sluggish interest and improving risk sentiment," said Andrey Kryuchenkov, an analyst at VTB Capital. "In the long run all is good, but for the moment some will be booking profits."

World stocks rose to their highest in over a week on Monday due to optimism about the global growth outlook. European equities reaching a four-week high, and U.S. equities also rose. <MKTS/GLOB> .EU .N

Other commodities were broadly higher, with oil prices up 1 percent and base metals strengthening. Coffee, sugar, cocoa and grains also rose. <O/R> <MET/L> <SOF/L>

While gold prices are coming under some pressure as risk aversion eases, in the longer term wider economic concerns are still supporting prices, analysts said.

"There are a lot of people who take a longer-term view," said Standard Bank analyst Walter de Wet. "Interest rates are low, so for the next six to 12 months, conditions still favor higher gold prices irrespectively of equity markets rallying."

GOLD ETF HOLDINGS AT RECORD

Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, were steady at a record 1,306.137 tonnes on Friday. <GOL/SPDR>

Investors still have an interest in holding gold in the medium- to long-term to protect against potentially inflationary government measures to service debt.

In a note on Monday, UBS said its economists had pushed back their expectations for U.S. and euro zone rate hikes. Low interest rates are positive for gold, because they cut the opportunity cost of holding non-interest bearing assets.

"While we certainly see inflationary threats ahead through the potential for the debt monetization route, that time horizon is some distance in the future," UBS said in a note.

"Instead, the reality this year of rising interest rates in the U.S., in the absence of rising inflation or indeed expectations, would not have been gold supportive. As such, our forecast for a looser monetary policy environment provides a positive backdrop to gold over the coming months."

Physical demand from gold's usual chief consumers, such as India and the Middle East, has been dented by higher prices.

But in a Reuters interview, the vice chairman of the Gem and Jewelry Export Promotion Council, Rajiv Jain, said Indian gem and jewelry export sales were expected to rise by at least 7-8 percent in 2011.

Precious metals rose in line with other commodities. Palladium, the biggest climber with gains of more than 3 percent, was last at $456.50 an ounce against $439, while platinum was at $1,559 against $1,539.50.

Silver was bid at $18.37 an ounce against $18.18.

(Editing by David Gregorio)