Gold steady as euro recovers but still vulnerable

LONDON Mon May 16, 2011 10:17am EDT

1 of 2. A man looks at gold jewellery displayed at a shop in Amman's gold market April 25, 2011.

Credit: Reuters/Ali Jarekji

LONDON (Reuters) - Gold held steady on Monday as the euro lifted off seven-week lows, but the currency remained vulnerable to uncertainty about indebted euro zone countries, which also sparked some safe-haven buying of the precious metal.

Spot gold was bid at $1,500.20 a troy ounce at 9:55 a.m. EDT, from $1,493.25 late in New York on Friday. The precious metal had hit a record high of $1,575.79 on May 2. U.S. gold was $1,497.90 an ounce.

The dollar earlier rose to a seven-week high against the euro as news that IMF chief Dominique Strauss-Kahn had been accused of attempted rape added to uncertainty. The euro then recovered, boosted by Asian central bank buying.

"If you have a strong dollar you will see gold fall, but in euro terms, gold will probably do quite well," said Dan Brebner, an analyst at Deutsche Bank.

Gold was around 1,057 euros, little changed from Friday's levels, and within touching distance of all-time highs above 1,075 euros hit in December.

Brebner added that the withdrawal of accommodative monetary policy was causing concern, because it could derail growth and lead to deflationary pressures.

The U.S. Federal Reserve's latest bond-buying program, or quantitative easing, is due to end in June, and the European Central Bank raised interest rates by a quarter percentage point to 1.25 percent in April.

"In that kind of environment (deflationary) gold will outperform industrial commodities. Gold is a deflation hedge, it is often used as a currency, and by definition currencies outperform in deflationary environments," Brebner said.

WAVE OF SELLING

Euro zone finance ministers meeting in Brussels are expected to back a bailout for Portugal and tell Greece it must deliver on agreed fiscal and privatization targets if it wants new emergency funding next year.

"Immediate concerns over peripheral debt troubles in the monetary union will not evaporate," VTB Capital said in a note. "The euro/dollar will probably continue to dominate trading."

Silver fell 3.5 percent to hit $34.03 but clawed back some of its losses and was last at $34.92 an ounce, from $35.28 on Friday. The industrial precious metal has crashed about 30 percent since a record high of $49.51 on April 28.

A wave of hot money from funds fueled a rally that saw the silver price nearly double in the space of four months, overwhelming fundamentals in an illiquid market.

But investor selling after exchange operators in Shanghai and New York raised the cost of trading silver, saw prices collapse in May.

"From a purely fundamental perspective, silver continues to look expensive and the market is likely to remain vulnerable to swings in sentiment. The next important technical support to watch is $33," Credit Suisse Private Banking said in a note.

"Physical use (of platinum group metals) is likely to grow on the back of strong global car sales, while investment interest is likely to remain robust. This should translate into higher prices over the course of the year."

However, precious metal refiner Johnson Matthey (JMAT.L) said on Monday that palladium attracted so much speculative money last year that it would struggle to lure enough new investors to repeat the 2011 rally.

Platinum prices are also expected to stay close to or just above their current levels, with the market broadly in balance, the company said.

"For palladium, we have extremely strong fundamentals -- growth in demand and a supply situation which, in terms of Russian state stocks, is clearly going to be lower than it was in each of the last three years," said JM's publications manager, Jonathan Butler.

At the same time, Butler said, there is a market overhang in terms of the speculative interest and a large amount of money in exchange-traded funds.

"With both of those things in mind, our forecast is clearly bullish, but we are not seeing the sorts of wild price increases we may have seen in previous times," he said.

"We are seeing considerable upside in prices but perhaps not increasing as rapidly as they did in 2010."

Platinum was bid at $1,760.50 an ounce from $1,756.05 on Friday and palladium was at $712.22 from $705.70 an ounce.

(Additional reporting by Rujun Shen and Sue Thomas; editing by Jane Baird)

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Comments (1)
RobertReeves wrote:
Am I the only one with a brain???
Take a look again at the Globex. Again a huge amount of open interest any here we go again………. Silver taking an un-needed dump.
Why isn’t gold higher? Well look at silver what a negative mood it has set for metals. Maybe if you got Morgan and Sachs away from the manipulated Globex you’d stand a chance. Well ya gotta give them credit. They sure have out smarted GATA

May 16, 2011 3:49pm EDT  --  Report as abuse
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