Gold stays near 3-week high on euro debt angst

NEW YORK/LONDON Tue May 24, 2011 4:55pm EDT

Five-tael (6.65 ounces or 190 grams) gold bars are seen at a jewellery store in Hong Kong in this April 21, 2011 illustration photo. REUTERS/Bobby Yip

Five-tael (6.65 ounces or 190 grams) gold bars are seen at a jewellery store in Hong Kong in this April 21, 2011 illustration photo.

Credit: Reuters/Bobby Yip

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NEW YORK/LONDON (Reuters) - Gold rose to its highest in about three weeks on Tuesday, as concerns about a spreading EU debt crisis fueled safe-haven buying, and the euro's gains on the dollar added support.

Spot gold rallied to $1,527.45 a troy ounce, its highest since May 4. By 3:20 p.m. EDT (2020 GMT), the yellow metal was changing hands at $1,525.49 an ounce, up from $1,516.05 in late New York trade on Monday.

In New York, benchmark COMEX June gold futures ended with gains of $7.9, or 0.52 percent, at $1,523.3 an ounce.

Late-session comments by St. Louis Federal Reserve Bank President James Bullard curbed gold's gains.

Speaking to a Rotary Club audience, he said the Fed could reverse its ultra-loose monetary policy in the second half of 2011 if the economic recovery goes well, but would likely keep its policy on hold "for a couple of meetings".

In the long term, there may be headwinds for the precious metal such as any decision by the Fed to increase interest rates, VTB Capital analyst Andrey Kryuchenkov said.

Low interest rates help gold, which competes with yield-bearing assets for investors' cash.

Earlier, the EMEA chief credit officer at ratings agency Moody's told Reuters that Portugal and Ireland would be at risk of multi-notch credit downgrades should Greece default.

"There is so much uncertainty that the downside risk for gold is low in the short term," Kryuchenkov said.

"People are still frightened about Portugal and about a possible restructuring of the Greek debt, so safe-haven flows will continue," he added.

An upbeat outlook for metal markets from Goldman Sachs also boosted precious and base metal prices, said David Meger, Vision Financial Markets director of metals trading, in Chicago.

"That report gave some support, along with ongoing concerns regarding European sovereign debt issues," he said.

Goldman said in a note: "We expect gold prices to continue to climb in 2011 as the resumption of quantitative easing should keep U.S. real interest rates low.

"However ... we expect U.S. real interest rates to begin to rise into 2012, likely causing gold prices to peak in 2012."

A lower U.S. dollar, which makes commodities priced in dollars cheaper for holders of other currencies, also supported gold.

The euro edged up from a two-month low against the dollar, lifted by better-than-expected German data.

Gold prices in British pounds hit a record high of 944.18 pounds an ounce. Gold denominated in euros hit a record high of 1,081.76 euros.

Gold came off its highs around midday, when data showed sales of new U.S. single-family homes rose unexpectedly in April to notch their second straight month of gains.

"It's a positive surprise. Sales activity continues to bounce along the bottom. There is no evidence of a second leg down for housing," said Richard Dekaser, economist at The Parthenon Group in Boston.

RENEWED INTEREST

Renewed investor interest in gold was reflected in holdings of the largest gold-backed exchange-traded fund (ETF), New York's SPDR Gold Trust, which rose 0.63 percent to above 38.88 million ounces on Monday from Friday.

Holdings in the largest silver-backed ETF, New York's iShares Silver Trust, fell 0.15 percent to around 325.9 million ounces on Monday.

Spot silver touched $36.68 an ounce, its highest since May 11, and traded near there late in the session, up from $35.04 late on Monday.

Platinum at $1,759.55 slipped from session highs, but was higher than $1,748.35 previously.

Spot palladium was bid at $736.22 an ounce, an increase over $727.99 late on Monday.

Platinum and palladium are used to make catalytic converters for cars, global production of which is expected to rise this year and next.

(Additional reporting by Pratima Desai in London; Editing by Dale Hudson)

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