NEW YORK/LONDON (Reuters) - Gold prices rose 1 percent Tuesday as investors turned to the safe haven after comments by the leaders of France and Germany about closer euro zone integration and deficit limits failed to ease worries about that region’s debt problems.
Sluggish German growth data added to recession fears and as well as to gold’s appeal.
Bullion extended gains on renewed fears about a European debt crisis after French President Nicolas Sarkozy and German Chancellor Angela Merkel stopped short of increasing the euro zone rescue fund but vowed to defend the single currency.
Gold had already benefited from a flight to safety as global equity markets were trading sharply lower after data showed Germany’s gross domestic product expanded just 0.1 percent from April to June versus the previous quarter.
Some analysts said that the metal was highly overbought and long due for a pullback after it gained as much as 13 percent in the last 15 days.
“At the end of the day, it (Sarkozy-Merkel news) is going to put worries back into the market about the euro and euro zone that may have been quieting down. It’s going to add additional volatility into the gold market,” said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.
McGhee said that the Franco-German plan is likely to sharply weaken the euro before any significant achievements.
Spot gold was up 1.1 percent at $1,784.99 an ounce by 3:34 PM EDT (1934 GMT), just $30 below a record $1,813.79 set on Thursday. It is up 25 percent this year driven by worries over U.S. and euro zone debt levels.
U.S. gold futures for December delivery settled up $27 at $1,785 an ounce. Trading volume totaled 160,000 lots, higher than Monday but sharply slower than the last week’s pace when the metal rose to records amid high volatility.
Gold was also underpinned as Wall Street remained lower even as rating agency Fitch affirmed its triple-A rating on the United States, in blatant disagreement with rival Standard & Poor’s.
However, market watchers said that gold is vulnerable for a severe pullback after the metal has rallied nearly $300 in the last 1.5 months.
“There is little doubt in my mind that gold is at a bubble which means that it will burst at any time,” said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank, which has $210 billion assets under management.
Davidson said he compared gold’s rally to the recent U.S. housing and technology stock bubbles. He added that gold’s correction could easily be at least 30 percent.
Buying sentiment also improved on news the largest gold fund players, including hedge fund titan John Paulson, stuck with their bullion bets in the second quarter, opting not to follow George Soros who further reduced his gold ETF holdings.
Famed gold bull Paulson held his ground with his $4.6 billion stake in the large gold exchange-traded fund SPDR Gold Trust in the second quarter, according to 13-F filings with the U.S. Securities and Exchange Commission that provide the best insight into where hedge funds are placing their bets.
Soros, who dumped almost his entire $800 million stake in bullion in the first quarter, further reduced his investment in SPDR Gold Trust by 13 percent to just over $6 million.
Among other precious metals, silver was up 0.5 percent at $40.05 an ounce. Platinum was up 0.6 percent at $1,813.50 an ounce, while palladium was up 1.3 percent at $754.22 an ounce.
Reporting by Frank Tang; Editing by Bob Burgdorfer