November 2, 2011 / 10:36 AM / 9 years ago

PRECIOUS-Gold rises on deepening euro zone crisis

* Euro factories decline deepens in Oct

* Euro bounces but vulnerable to Greek events

* Coming up: Federal Reserve statement 1630 GMT (Updates prices)

By Susan Thomas

LONDON, Nov 2 (Reuters) - Gold rose on Wednesday on demand for the metal as a safe haven investment away from market turmoil as the euro zone troubles deepened and business surveys showed the severe impact the crisis has had on manufacturing in the region.

The dollar is also under pressure ahead of the outcome of a Federal Reserve policy meeting later in the session. A weaker dollar makes gold cheaper for non U.S. buyers.

Greece’s Prime Minister George Papandreou shocked markets on Tuesday with a call for a referendum on a European Union 130 billion euro bailout package. He faces a grilling on Wednesday from the leaders of Germany and France.

Adding to the gloom, business surveys showed the downturn in euro zone manufacturing in October was even deeper than previously reported.

“There is more of a risk aversion type dynamic developing because of all the complications around Europe and with the Greek referendum on the cards,” Standard Chartered head of metals research Dan Smith said.

“All these things will bring some doubts about the political and macro outlook.”

But in positive news, U.S. private employers added more jobs than expected in October, and more were added in September than originally reported, while a separate report showed planned layoffs dropped sharply last month.

U.S. gold GCcv1 rose 1.9 percent to $1,744.3 an ounce at 1457 GMT. Spot gold rose 1.4 percent to $1,742.9 at 1413 GMT, from $1,718.95 on Tuesday.

The euro gained against the dollar on Wednesday after three days of losses, as investors took a breather from selling the single currency to square up positions and focus on the possible outcome of a Federal Reserve policy meeting.

U.S. Federal Reserve chief Ben Bernanke will hold a news conference later in the day at the end of a two-day policy meeting.

The Fed looks set to take a breather from monetary stimulus measures, even if financial market turbulence heightens the chances of action later.

“Over the next few days, we think gold prices are likely to remain more resilient as the market should benefit from safe haven demand and its reasonable evaluation,” Barclays Capital said in a note.

Gold has risen by more than 20 percent so far this year and is heading for its 11th year of gains as investors seek an alternative to the dollar and protection against rising inflation expectations.

G20 PRESSURE

Investors will also closely watch the rate decision by the European Central Bank due on Thursday, just as a Group of 20 summit is to take place and likely to pressure Europe on the debt crisis solution.

Investor interest in gold continued to pick up this week, reflected in inflows of metal into exchange-traded funds.

Holdings of gold in the major exchange-traded funds (ETF) tracked by Reuters have risen by over 800,000 ounces this month, marking their first monthly increase since July.

In ETF flows on Wednesday, gold holdings were up by just over 11,000 ounces after an inflow into the COMEX Gold Trust.

Last month, global holdings of gold in ETFs rose by 852,000 ounces to 67.907 million ounces, more than offsetting the 444,000 ounces outflow in September and the 297,000 ounces outflow in August.

“They have been trending up for the last week or so. Investors are coming back in to those two (gold and silver) because of the weaker macro environment,” Smith said.

“It’s also a good time of the year for physical demand for gold as well as we head into the end of the year because of the Indian wedding season.”

The bulk of the inflows were into European-based funds, rather than their larger U.S. counterparts, which analysts have said is reflective of the anxiety among investors in the region over the impact of the euro zone debt crisis on monetary policy, inflation and growth.

Silver rose more than 3 percent to $34.24 an ounce from $33.27 previously. Platinum rose 1.6 percent to $1,607.49 an ounce from $1,582.65, and palladium was $647.47 from $631.50. (Additional reporting by Amanda Cooper)

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