* Gold set for strongest rise since mid-Dec
* Euro correlation at two-year high
(Updates prices, adds U.S. factory data)
By Amanda Cooper
LONDON, Jan 3 Gold rose by nearly 2
percent on Tuesday, fuelled by a recovery in the euro against
the dollar, after the bullion price neared six-month lows last
week in a flurry of year-end selling.
Mounting tensions between Iran and the United States over a
possible disruption to oil supply boosted crude oil futures but
did little to elicit any safe-haven buying of gold, which
remains tightly tethered to the ebb and flow of the euro.
Gold's correlation with the euro/dollar exchange rate is at
its most positive in nearly two years, meaning the bullion price
is more likely to move in lockstep with the euro than at any
other time since January 2010.
Speculators placed their heaviest bets ever against the
single European currency last week, in light of the lack of a
lasting solution to the euro zone debt crisis and the knock-on
effect on the regional economy.
Spot gold was last up 2.05 percent at $1,597.29 an
ounce by 1511 GMT, set for its largest one-day rise since
mid-December after data showed the U.S. factory sector expanded
at its fastest pace in six months in December, which fed
investor appetite for riskier assets such as the euro.
"Other than events in the euro zone, I think it is going to
be quite key to see what happens with the situation in Iran over
the next few days," Credit Suisse analyst Tom Kendall said.
"If the situation there deteriorates and there are perceived
to be significant risks to oil supply from Iran, then you would
expect to see a significant move in crude prices and for that to
spill into gold," he said, adding a sharp rise in energy prices
could trigger some concern about future inflation among
investors, thereby benefiting gold.
"The first levels for gold are the round number, $1,600, and
above that the resistance is provided by what was formerly the
support, which is the 200-day moving average which is around
$1,630," Kendall said.
Military exercises in the Middle East Gulf by Iran and the
movement of U.S. naval vessels in the area have raised fears of
a confrontation between Tehran and Washington that could cut off
oil exports from the region.
Iran has said it could shut the Strait of Hormuz, through
which 40 percent of world oil is shipped, if sanctions were to
be imposed on its crude exports.
Meanwhile, in Europe, France's Nicolas Sarkozy will meet
German Chancellor Angela Merkel in Berlin on Jan. 9 for talks
that are likely to centre on new rules to enforce budget
discipline across the European Union.
The two leaders are anxious to flesh out a plan agreed at a
December summit by all EU members except Britain for a new
treaty to forge closer fiscal integration, as Europe battles to
stem a sovereign debt crisis in the euro zone.
The gold price rose by a net 10.2 percent in 2011, but the
resulting strength of the U.S. dollar from the euro zone debt
crisis whittled this increase down from a gain of as much as 33
percent, when gold hit a record $1,920.30 in early September.
A strong dollar encourages non-U.S. gold holders to sell
their bullion holdings in order to make a profit when buying
their own currencies more cheaply.
"I would say it all really depends on the euro for the time
being. This is really where gold takes its cue from," RBS
commodities analyst Nikos Kavalis said .
The euro could rebound in the near-term
despite the problems affecting continental Europe, as investors
are overly bearish on the currency, investor Jim Rogers said on
Rogers, who co-founded the Quantum Fund with George Soros in
the 1970s and is a well-known commodities bull, also said he
remains bullish on commodities in general but expects gold will
drop further given the run-up over the last 10 years.
"In my view, gold could go to $1,200-$1,300 (an ounce)...
Gold has been up 11 years in a row which is extremely unusual in
any financial asset so gold is overdue for a correction," he
told Reuters Insider in Singapore where he now resides.
Another short-term risk to the gold price in early January
is the rebalancing of commodity indices, which may result in
fund investors needing to hold less gold in their portfolios.
"Short-term there is the risk of further pressure as fund
repositioning and Index re-balancing commences, however,
improved physical interest is likely to provide good support,"
Fastmarkets analysts wrote in a note.
In other precious metals, silver rose 3.6 percent to
$28.80 an ounce, while platinum rose 1.0 percent to
$1,408.49 an ounce and palladium rose 2.4 percent to
$665.50 an ounce.
(Editing by James Jukwey)