* 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 (Reuters) - 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 Tuesday.
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)