Gold holds near $1,360/oz

LONDON (Reuters) - Gold prices steadied near $1,360 an ounce in Europe on Monday, surrendering earlier gains as the dollar hit a fresh two-month high versus the euro but remaining supported by concerns over euro zone debt levels.

A 999.9 fine gold 100 troy ounce Engelhard gold bar is seen on the floor of the New York Stock Exchange in New York, November 9, 2010. REUTERS/Shannon Stapleton

Investors fear that Portugal may be the next country that struggles with its sovereign debt after Greece and Ireland were forced to seek bailouts from the European Union earlier this year.

Spot gold was bid at $1,361.05 an ounce at 11:01 a.m. ET (1601 GMT) against $1,361.73 late in New York on Friday, having earlier risen as high as $1,367.65.

RBS Global Banking & Markets analyst Daniel Major said euro zone sovereign debt concerns were pulling gold in two directions at once. “You have seen moves in the currency markets that are offsetting, to an extent, the sovereign concerns,” he said.

“The stronger dollar ... has clearly put pressure on gold, and offsetting that you have people looking toward gold as a hedge against potential devaluation of currencies, and debt levels, and potential defaults,” he added.

EU finance ministers on Sunday endorsed a bailout package to help Dublin cover bank debts and bridge a budget deficit and outlined a permanent system to resolve the euro zone debt crisis.

A key question is whether the EU has done enough to prevent debt problems from spreading to other euro zone members such as Portugal and Spain, something left unresolved after Greece was bailed out in May. <FRX/>

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“Portugal is the next interesting (story),” said Michael Widmer, an analyst at Bank of America-Merrill Lynch. “There were newspaper reports out there suggesting that authorities from the core countries are trying to put pressure on Portugal to apply for a bailout from the European rescue fund.”

Meanwhile, the spreads between Italian and Spanish 10-year government bonds and their German equivalent widened to euro-lifetime highs on Monday. <GVD/EUR>

Physical gold demand emerged last week as prices slipped back toward $1,350 an ounce, especially in Asia, analysts said.

“Our sales to India Friday were the largest since October 27, when gold traded under $1,330, and more than double the 2010 daily average,” UBS analyst Edel Tully said in a note.

“This is a strong indicator that there’s much residual physical demand in the system that will provide ample support on dips,” she added.

On the supply side of the gold market, data showed Australian gold production rose 22 percent in the third quarter to 67 tonnes. Australia is the world’s second-biggest gold producer after China.

Among other precious metals, silver was at $26.80 an ounce against $26.66. The world’s largest silver exchange-traded fund, the iShares Silver Trust, said its holdings fell to 10,711.23 tonnes on November 26 from a record high.

Platinum was at $1,633 an ounce against $1,645, while palladium was at $681 against $674.

Reporting by Jan Harvey; editing by Anthony Barker