July 23, 2010 / 1:02 AM / 9 years ago

Gold falls but holds ground after stress tests

NEW YORK (Reuters) - Gold fell on Friday with no surprises to stir safe-haven demand but the metal largely held its ground after stress tests showed seven European banks were not strong enough to withstand another recession.

Analysts had expected five to 10 banks to fail the test. As expected, no big banks failed the health check, but banks in Germany and Greece were seen as weak spots and in need of restructuring.

James Steel, chief commodities analyst at HSBC, said investors did not rush into gold, viewed as a safe haven in times of economic uncertainty, because the test outcome has already been factored into prices.

“I think this stress test has gone reasonably well according to assumptions. So, we haven’t had very much a flight to quality buying in the gold market,” Steel said.

After the stress tests results, the gold market largely took its lead from the euro, which fell against the dollar on worries the tests were not strict enough to reveal the true health of the sector, traders said.

Spot gold was at $1,187.05 an ounce at 2:54 p.m. EDT, against $1,195.35 late in New York on Thursday. Earlier it climbed as high as $1,203.45 on economic optimism.

U.S. gold futures for August delivery settled down $7.80 at $1,187.80.

Gold was lower for a second straight week, as prices still failed to break out of a broad range between $1,180 and $1,220.

Earlier this week, gold challenged an important bullish support line at below $1,180 an ounce, but the metal bounced off support, which was seen as a natural entry point among technical analysts.

Renewed sovereign credit risk, however, could provide fresh incentive for gold buyers, said Bruce Dunn, vice president of trading at New Jersey-based physical metal merchant Auramet.

“The market has been relatively quiet, so gold is going to need a new catalyst to carry momentum to the upside again,” Dunn said.

A stronger dollar against euro has pressured bullion this week. The usual inverse relationship between gold and the dollar too weakened at the start of the year as both benefited from risk aversion during the sovereign debt crisis, but has since shown signs of reemerging.

“As is typical with gold, relationships are changing,” said Societe Generale analyst David Wilson. “We’ve gone from a positive correlation between gold and the dollar - both being safe havens - to a negative one in the space of a few days.”

Similar to gold, Wall Street showed a mute reaction to the stress test, but stocks climbed 1 percent as solid corporate earnings and a dividend hike by bellwether General Electric boosted sentiment. .N

PHYSICAL DEMAND SOFTENS

Demand for physical gold investment products including ETFs, coins and bars has softened as concerns over financial market stability have receded, analysts said.

U.S. Mint data showed the popular one-ounce American Eagles gold coin sales was at 98,000 so far in July, a far cry from a 2010 high of 190,000 in May.

Holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust, fell more than 6 tonnes to a six-week low of 1,302.046 tonnes on Thursday.

A Reuters poll of 55 analysts, traders and fund managers released earlier this week showed an average forecast of $1,197 an ounce in 2010, rising to $1,228 next year.

Gold is now looking forward to a number of key U.S. economic indicators for trading cues, including the advanced reading of the second-quarter GDP due Friday.

Among other precious metals, silver was at $18.08 an ounce against $18.07, while platinum was at $1,539.50 an ounce versus $1,521.10 and palladium at $465.50 against $454.

Additional reporting by Jan Harvey in London; Editing by Sofina Mirza-Reid

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