PRECIOUS-Gold hovers above $1,600, recovery hopes offset bargain buys

Wed Feb 20, 2013 2:42am EST

* Shanghai gold futures, spot contracts drop to multi-month
lows
    * Stellar stock market performance attracts investors
    * Spot gold may test $1,599/oz support -technicals
    * Coming up: U.S. FOMC meeting minutes; 1900 GMT

 (Adds details; updates prices)
    By Rujun Shen
    SINGAPORE, Feb 20 (Reuters) - Gold struggled to rise
significantly above $1,600 an ounce on Wednesday, as ebbing
interest in the safe-haven metal amid signs of an improving
global economic outlook offset purchases by bargain hunters in
Asia.
    Gold may continue its recent trading pattern in which prices
rise initially with support from buyers in China and other Asian
countries, and drop after Asian trading hours end, traders said.
    The most-active Shanghai gold futures contract and
two spot gold contracts on the Shanghai Gold Exchange
  dropped to their lowest levels in
nearly seven months, tracking losses in the global market, but
the lower prices have attracted strong buying interest. 
    "We have seen quite strong interest in the domestic market
as prices weaken, although such demand is unable to push prices
much higher," a Beijing-based trader said.
    "Once prices stabilise around this level, we may see demand
dwindle. But another sharp retreat or rally in prices will
trigger a lot of investment and physical gold demand."
    Spot gold inched up 0.2 percent to $1,608.06 an ounce
by 0709 GMT. It dropped to just above $1,600 on Tuesday, close
to a six-month low of $1,598.04 hit last week.
    U.S. gold also rose 0.2 percent, to $1,607.60.
    Technical analysis suggested spot gold is expected to test
support at $1,599 an ounce. A break below that would lead to a
further fall towards $1,582, said Reuters market analyst Wang
Tao. 
    The formation of a "death cross" on the spot gold chart,
with its 50-day moving average dropping below its 200-day moving
average, also suggests a pullback could be on the way. 
    However, a Relative Strength Index below 30 since late last
week indicates the market has been oversold.
    
    Confidence in economic recovery sent the S&P 500 index
 and Dow Jones industrial average to their highest
in more than five years. S&P 500 has climbed more than 7 percent
so far this year, compared with a 4-percent loss in cash gold.
 
    The latest piece of good news on global economy was that
German business sentiment soared to its highest level in nearly
three years this month, enhancing optimism that the worst of the
euro zone debt crisis is over. 
    "The inverse correlation between gold and equities has
become very pronounced, as investors gravitate towards
high-yielding and riskier assets," said Li Ning, an analyst at
Shanghai CIFCO Futures.
    Investors will be focusing on the wording in the minutes of
the U.S. Federal Reserve's latest policy meeting, due later in
the day, to gauge the central bank's attitude towards its
monetary policy, which has helped gold's rally in recent years.
 
    "Unless the Fed expresses a very pessimistic view on the
economic outlook, gold is unlikely to react with a strong
rally," Li said. 
    Holdings of SPDR Gold Trust, the world's top
gold-backed exchange-traded fund, dropped more than 3 tonnes
from the previous session to 1,319.964 tonnes on Feb. 19, the
lowest level in nearly five months. 
    Spot platinum edged down 0.3 percent to $1,682.03 an
ounce, after Anglo American Platinum said its workers
at all of its South Africa operations have returned to work
after a one-day walk-out. 
    
     Precious metals prices 0709 GMT
  Metal             Last    Change  Pct chg  YTD pct chg    Volume
  Spot Gold        1608.06    3.85   +0.24     -3.97
  Spot Silver        29.58    0.16   +0.54     -2.31
  Spot Platinum    1682.03   -5.72   -0.34      9.58
  Spot Palladium    761.10   -0.12   -0.02      9.99
  COMEX GOLD APR3  1607.60    3.40   +0.21     -4.07        16931
  COMEX SILVER MAR3  29.55    0.13   +0.44     -2.25         6082
  Euro/Dollar       1.3427
  Dollar/Yen         93.37
  COMEX gold and silver contracts show the most active months
 

 (Editing by Himani Sarkar and Tom Hogue)
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