Gold rises above $1,370 as dollar turns lower

LONDON Mon Jan 10, 2011 11:52am EST

A shopkeeper shows gold bars after buying them from a customer in Bangkok's Chinatown October 14, 2010. REUTERS/Sukree Sukplang

A shopkeeper shows gold bars after buying them from a customer in Bangkok's Chinatown October 14, 2010.

Credit: Reuters/Sukree Sukplang

LONDON (Reuters) - Gold rose above $1,370 an ounce on Monday as the dollar moved into negative territory versus the euro, and as concerns over the outlook for Portugal's sovereign debt lifted the metal's appeal as a haven from risk.

Spot gold was bid at $1,370.75 an ounce at 1635 GMT, against $1,368.80 late in New York on Friday. U.S. gold futures for February delivery rose $1.90 an ounce to $1,370.80.

Prices last week posted their biggest one-week fall since May 2010 after a run of better-than-expected U.S. data lifted expectations that monetary policy could tighten sooner rather than later.

The return of concerns over the euro zone has tempered that dip, though risks remain.

"Overall positive U.S. economic data last week reduces the likelihood of further quantitative easing, thus weighing on gold's safe haven and inflation hedge appeal," said BNP Paribas analyst Anne-Laure Tremblay.

"Higher bond yields are also raising the opportunity cost for holding gold. Beyond this short term correction, we continue to hold a positive view of the gold price for the balance of 2011," she added. "Sovereign risk will remain a key theme for gold in 2011."

A senior euro zone source said on Sunday pressure is growing on Portugal from Germany, France and other euro zone countries to seek financial help from the European Union and International Monetary Fund to stop the bloc's debt crisis from spreading.

The euro reached a four-month low against the dollar, although it later recovered to trade 0.2 percent higher.

A stronger dollar typically pressures gold, because it makes the metal more expensive for holders of other currencies and reduces its appeal as an alternative asset.

When risk aversion grows in the euro zone, it can lift the appeal of both the dollar and gold. Last year the usual negative correlation between gold and the dollar weakened at times when the euro zone crisis flared up, notably in the second quarter.

INDIAN BUYERS ATTRACTED

Buying in India, the world's biggest gold consumer, rose on Monday after last week's price fall attracted buyers back to the market, and traders stocked up ahead of the upcoming harvest festival and on wedding demand, dealers said.

But interest in gold-backed exchange-traded funds continued to be lacklustre, with holdings of the largest, New York's SPDR Gold Trust, dropping by a further 1.5 tons on Friday.

Societe Generale said in a weekly note that buying by exchange-traded funds had been markedly slower as prices rose above $1,400 an ounce.

"This, of course, does not necessarily mean that investor appetite has become sated," it said. "ETF purchases, as noted above, were eclipsed by the very strong demand in (over the counter) products, and there are clear indications that this demand will remain strong this year."

"This will be driven by Chinese buying at the retail level in particular," it added.

Holdings of the largest silver ETF, the iShares Silver Trust, also fell more than 53 tons on Friday. Spot silver was at $28.98 an ounce against $28.69.

Platinum was at $1,744.50 an ounce against $1,731, while palladium was at $751.72 against $748.50.

(Editing by James Jukwey)

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