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Gold firms on Spain's debt rating cut

New York, May 29, 2010

Gold edged up after Fitch Rating cut Spain's debt ratings, renewing fears of spreading euro zone credit problems and pressuring the euro and US stock prices, which pushed some gold investors to cover short positions before the long holiday weekend.

Spot gold firmed to $1,213.85 an ounce by 2:45 p.m. EDT (1845 GMT) from $1,211.10 late in New York on Thursday.

Benchmark US gold futures for August delivery on the Comex division of the New York Mercantile Exchange finished 60 cents firmer at $1,215.0 an ounce.

The Fitch rating agency downgraded Spain's credit by one notch late in the Friday session, saying the country's economic recovery will be "more muted" than the government forecast, due to austerity measures.

With the holiday weekend in the US and London shutting markets on Monday, trade was already exceptionally light. Those players still left in New York were simply waiting for gold prices to settle when the news was released.

As a result, traders' response to the news was muted.

"I think everyone knew this was coming anyway. We all know that Portugal, Spain and Italy are the next weak links in Europe. So, the reaction was already built into (gold) prices," said David Lee, precious metals trader at Heraeus Precious Metals Management in New York.

He and others noted that the downgrade was slight and unlikely to have much impact on Spain's borrowing costs.

The ratings agency cut Spain's long-term foreign- and local-currency issuer default ratings to AA-plus from AAA, and put the outlook on the new ratings at stable.

"It hasn't been downgraded to the point that people are thinking it's junk status. Gold came up from the lows after the announcement, but it was a muted reaction," Lee added.

George Nickas, gold broker at FC Stone in New York noted that gold turned higher after the news, and said he thought some investors covered short positions in gold as a precautionary measure ahead of the long weekend.

The euro and US stock prices both slumped after the rating cut, and some investors who pulled money from other assets opted for gold.

US equities fell 1 per cent, extending early losses after the downgrade reignighted worries about euro-zone debt.

The euro fell across the board after Fitch cut Spain's debt ratings on concern that austerity measures will dampen the country's economic recovery. The euro was on track for a hefty 7.5 per cent decline in May.

Earlier, gold traders paid little attention to the spate of US economic releases, with most players biding their time until the Comex market closed for the weekend and the month.

Unexpectedly flat US consumer spending in April, its weakest since September, weighed on the euro and gave gold some safe-haven support at lower levels.

Bullion also found modest fundamental support from a rise in holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund to a record.

Analysts do not expect a big fall in bullion. "People are still holding it, they haven't gotten out," said Rory McVeigh, trader at Commerzbank. "They're going to hold it to wait and see where the price action with the euro goes."

Top consumer India's gold imports fell an annual 39 per cent in May, as record prices hit demand at a time when sales were expected to rise around a key Hindu festival.

Focus on PGMS

Spot platinum fell to $1,544.50 an ounce after rising earlier to $1,569 an ounce, its highest since May 20.  Late in New York on Thursday it was higher at $1,561.

Spot palladium slipped to $459.25 an ounce, off Thursday's late quote at $462 an ounce. Earlier, it hit $467.03 an ounce, its highest since May 19.

Carmakers account for around half of annual demand for both metals, used in autocatalysts. Strength in Chinese car sales and recovering US automotive demand this year have especially benefited palladium.

News of an increase in the amount of metal allowed in the platinum and palladium ETFs had also given a boost to the metals, said Rory McVeigh, Commerzbank trader said.

Silver was lower at $18.36 an ounce than $18.45 an ounce late in the previous session. – Reuters




Tags: Gold | Spain | Fitch | euro | New York | Comex |

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