Gold rises but Wall Street sell-off, Japan weigh

NEW YORK Wed Mar 16, 2011 4:46pm EDT

A gold bar is pictured during its stamping at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna February 28, 2011. REUTERS/Lisi Niesner

A gold bar is pictured during its stamping at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna February 28, 2011.

Credit: Reuters/Lisi Niesner

NEW YORK (Reuters) - Gold rose on Wednesday but the metal struggled to extend gains following the previous day's sharp decline, as panic selling in the equity markets prompted investors to sell bullion to cover losses.

Bullion ended well off its session highs as Wall Street briefly wiped out gains for 2011, as a quake-crippled Japan raised concerns about slower worldwide growth. U.S. stocks ended 2 percent lower, as volatility soared on speculation that damage to nuclear reactors in Japan wasn't contained.

"There is a severe reduction in risk appetite out there. If we see the nuclear crisis really unfolds in a massive way, that could very well kill sentiment and a good portion of global growth, as Japan is the third largest economy in the world," said Bart Melek, head of commodities strategy at TD Bank Financial Group.

Earlier in the session, bullion was underpinned by renewed euro debt worries after Moody's credit rating agency downgraded Portugal by two notches late Tuesday.

Spot gold gained 0.2 percent to $1,396.70 an ounce at 3:49 p.m. EDT (2049 GMT). U.S. gold futures for April delivery settled up 0.2 percent to $1,396.10.

Total trade in U.S. bullion futures was just below its 30-day average, preliminary Reuters data showed, after it rose to the highest level since late January on Tuesday.

On charts, gold bounced off its 50-day and 100-day moving averages during Tuesday's sell-off, but Barclays Capital strategists said that bullion's failure to extend gains after recent rallies suggested prices could fall toward $1,360 an ounce.

Year to date, bullion turned negative and was down 1.5 percent after the metal on Tuesday notched its biggest one-day drop since January.

Also underpinning gold was surging U.S. producer prices in February, their fastest pace in 1-1/2 years, a day after the Federal Reserve said it had a watchful eye on inflation pressures it expects to subside.

Unrest that swept the Middle East and North Africa earlier this year, a key factor pushing gold to a record $1,444.40 an ounce last week, continues to simmer.

The Libyan army closed in on the opposition bastion of Benghazi on Wednesday, while in Bahrain forces fired tear gas in a crackdown on protesters.

YEN NEAR RECORD HIGH

Gold trading was choppy as the yen rose nearly 1 percent to approach its record high against the dollar on mounting concerns in Japan, with investors nervously watching if Japanese authorities will soon step in to stem the currency's rise.

Other traditional safe havens rose, with the Swiss franc hitting a record high against the dollar and benchmark U.S. Treasury yields touching their lowest in three months after housing data highlighted the fragility of the U.S. economic recovery.

Interest in gold exchange-traded funds remained lackluster, with holdings of the largest, New York's SPDR Gold Trust, edging down by another 0.9 tones on Tuesday to a 10-month low, continuing a trend seen throughout this year.

Japan's crisis has hit demand for platinum group metals (PGM), with some of the world's top auto makers forced to halt production of vehicles that use the metals for autocatalysts.

(Additional reporting by Jan Harvey in London; editing by Sofina Mirza-Reid)

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