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Gold set for third day of losses as dollar firms

London, October 9, 2012

Gold was on course to book a third successive day of losses on Tuesday, as concerns over the euro zone's peripheral economies sent the euro lower and strengthened the dollar.

The single European currency slipped after a meeting of euro zone finance ministers on Monday dashed investors' hopes of a bailout for Spain's troubled economy, with ministers insisting that Madrid was still able to fund itself via capital markets.

News that Greece's international lenders may give Athens longer to meet its deficit reduction targets also weighed on the euro, which in turn helped lift the dollar index from a two-week low.

A stronger dollar usually makes gold less affordable for non-US investors and tends to push the price lower.

Spot gold fell 0.2 per cent to $1,771.09 an ounce at 1045 GMT, bringing the fall over the last three trading days to nearly 1 per cent, although the price was still close to its highest in 11 months.

However, analysts said the price move was little more than a modest correction and recent moves by central banks to loosen monetary policy, including the Federal Reserve's open-ended bond-buying plan announced last month, supported gold in the long term.

"The return of dollar strength has stalled the move in gold, but it's very temporary, we're still on track to see more gains," said Deutsche Bank's Michael Lewis.

"The danger with Greece and Spain is that it does have a tendency to increase the buying of US treasuries, which is dollar supportive. But our sense is that the real driver for the dollar will be real interest rates and real interest rates in the US are negative."

Gold usually benefits from an environment of low real interest rates, those that strip out the effect of inflation, as it lowers the premium that investors would otherwise forfeit if they held bullion rather than a yield- or dividend-bearing asset such as company shares or currencies.

The gold price has risen more than 13 per cent so far this year, in large part because of the efforts of the world's major central banks to keep monetary policy loose.

POLICY LOOSE

The central bank in China, the world's second largest gold buyer, on Tuesday made its second largest gross cash injection into domestic money markets on record, with a boost of 265 billion yuan ($42.15 billion).

Meanwhile, the International Monetary Fund cut its 2012 global growth forecast to 3.3 per cent from 3.5 per cent and warned US and European policymakers that failure to solve their respective economic problems would only make the slump worse.

Reflecting continued investor demand for gold against a worsening economic backdrop was another inflow of metal into exchange-traded products (ETPs), which brought global holdings to a fresh record of 74.76 million ounces by Monday's close.

Consumers have been more reticent to step into the market and buy gold with the price close to its highest since November last year.

"The jewellery sector has been badly affected, as people are reluctant to spend," said a Singapore-based trader. "The lack of physical demand is worrying."

In other precious metals, silver fell 0.2 per cent to $33.88 an ounce to hover around its lowest in two weeks.

Platinum edged higher, rising 0.2 per cent on the day to $1,689.75 an ounce.

There was no sign that the unrest that has swept through South Africa's platinum belt was easing. Nearly 100,000 workers are on strike in the country and 75,000 of those work in the mining industry.

Several operations belonging to world number one producer Anglo American Platinum remain shuttered, along with facilities belonging to other smaller miners. – Reuters




Tags: US | Gold | London |

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