PRECIOUS-Gold eases from record highs, eyes euro summit

Tue Jul 19, 2011 9:41am EDT

(Updates prices, adds comment)

* Gold retraces after hitting record early in Europe

* Euro, stocks, oil rebound after Monday's losses

* All eyes on U.S. debt crisis, European summit

By Jan Harvey

LONDON July 19 (Reuters) - Gold prices eased a touch on Tuesday after earlier hitting record highs, as a rebound in assets seen as higher risk, such as shares and the euro, took some of the heat out of the appetite for safe havens.

Gold prices remained elevated, however, as investors continued to favour the metal amid heightened concerns that the debt crisis engulfing Greece may ensnare Italy and Spain, and as time grew short for raising the U.S. debt ceiling.

Spot gold hit a peak of $1,609.51 an ounce and edged down 0.1 percent to $1,601.89 an ounce at 1322 GMT. It is up 13 percent so far this year, supported by concerns over the euro zone debt crisis and the potential for further U.S. quantitative easing.

"All depends on what happens in the euro zone... and QE3," said Andrey Kryuchenkov, an analyst at VTB Capital. "(We) don't expect it, but some are pricing it in. Should risk aversion escalate, (gold) will go higher."

The euro rose broadly on Tuesday as debt yields of some weaker euro zone countries retreated, taking a breather after sliding to record lows against the Swiss franc -- which is commonly seen as a safe store of value -- on Monday.

German government bond prices fell as lower-rated euro zone debt stabilised slightly, prompting investors to book profits in Bunds after their rally to near 8-month highs, while European shares rose after a sharp fall in the previous session.

But jitters remained in the financial markets given divisions among policymakers ahead of Thursday's euro zone summit, with few expecting a permanent solution to the region's debt crisis.

U.S. President Barack Obama and top lawmakers are also facing more pressure for a debt deal amid a growing sense that a last-ditch plan taking shape in Congress may be the only way to avoid a devastating U.S. default.

"Although the challenges facing the EU and U.S. are different, they share some common themes in that they are both based on sovereign debt issues and are seen as being political as well as economic in nature," said HSBC in a note.

"Taken together, the combined effect on gold prices is... bullish, as investors wary of dollar and euro assets, seek a safe alternative. Based on this, we believe at least one of these dilemmas has to be resolved or at the least some tangible progress made on a solution before gold is likely to retrace."

FUNDS SEEK PROTECTION

Investors are hoarding gold and cash as a perfect storm brews in equity and credit markets, with data published by EPFR Global, which tracks flows in and out of funds, showing a thirst for gold helped drive the biggest inflows into commodities funds for 14 weeks in the week to July 15.

Holdings of precious metals-backed exchange-traded funds rose on Monday, with the amount of gold held by the largest gold ETF, New York's SPDR Gold Trust rising by 13.3 tonnes after a 10-tonne inflow the previous day.

"Exchange-traded funds in the last five sessions have gained just over 50 tonnes (of gold), so there is clearly money coming back in," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

"It's not going to be one-way traffic, but the fundamental issues and concerns haven't gone away.... and people have realised that gold is important as a currency."

The largest silver-backed ETF, the iShares Silver Trust said its holdings rose 39.4 tonnes on Monday.

The gold:silver ratio -- the amount of silver needed to buy an ounce of gold -- dipped under 40 this week for the first time since early May as silver outperformed gold in a rising market, a common phenomenon given its lower liquidity.

"Silver is clearly benefiting from its greater affordability, attracting investors who are keen on hard assets during these uncertain times," said UBS in a note. "(Its ratio to gold) looks poised to fall further in the near term, particularly if risk aversion continues to dominate."

Silver was bid at $40.24 an ounce against $40.51. Spot platinum was bid at $1,770.24 an ounce versus $1,769.98, while spot palladium was at $790.97 an ounce against $792.57. (Editing by James Jukwey)