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Gold prices retreat after sharp post-Fed rally

London, February 27, 2013

Gold retreated on Wednesday after rising more than 1 per cent in the previous session as investors cashed in some gains ahead of a second day of testimony by Federal Reserve Chairman Ben Bernanke and a string of US economic data.

The metal posted its biggest one-day rise in three months on Tuesday after Bernanke provided reassurance on the Fed's commitment to loose monetary policy, burnishing bullion's appeal as a hedge against inflation.

It struggled to maintain those gains, however, as investors remained wary over gold's longer-term prospects, given expectations for a further recovery the economic cycle, which could favour higher-risk assets.

Spot gold was down 0.4 per cent to $1,606.51 an ounce at 1044 GMT, off a 1-1/2-week high of $1,619.66 on Tuesday. The metal had touched a seven-month low of $1,554.49 on February 21.

US gold futures for April delivery were down 0.6 per cent at $1,606.30.

"The drop to $1,554 we saw in the past 10 days was really too quick, and prices didn't need too much input to regain the $1,600 mark yesterday," Natixis analyst Bernard Dahdah said.

"Today prices are slightly lower... we see gold supported around these levels as the Fed's second day of testimony should reiterate a QE-supportive stance."

Bernanke strongly defended the US central bank's stimulus measures before Congress on Tuesday, easing fears it would cease buying bonds through so-called quantitative easing sooner rather than later.

He is due to testify before the House Financial Services Committee at 1500 GMT.

The three rounds of QE from the Fed have helped gold stage a record-breaking rally in the past few years as investors have worried about currency debasement due to money-printing and have sought to store value in gold.

But concerns that the central bank could exit the policy on signs of a fledgling economic recovery have weighed on the metal over the past weeks.

The market is also likely to monitor US durable goods data and pending home sales figures to assess the state of recovery in the world's biggest economy.

"Jitters on the currency market are by no means over where macro numbers from the United States and Europe continue to lean in favour of the dollar, and given the current debate over ongoing easing within the FOMC (Federal Open Market Committee) itself," VTB Capital said.

The dollar cut some earlier losses against the euro after a bond auction in Italy saw healthy demand but rising borrowing costs. The auction was the first test of investor demand for the country's debt after inconclusive weekend elections spooked financial markets, leaving stock markets mixed today.

Worries that Italy's inconclusive elections could drag the euro zone into another crisis have supported demand in safe-haven assets such as gold and U.S. Treasuries in the previous session.

ETF HOLDINGS FALL FURTHER

As a gauge of investor interest, holdings of the SPDR Gold Trust, the world's top gold-backed exchange-traded fund, fell 2.408 tonnes from the previous session to 1,270.44 tonnes on February 26, in its sixth session of decline.

The sell-off in exchange-traded funds (ETFs) since the start of the year is mostly due to a perceived improvement in the global economic outlook and concerns on the longevity of the Fed's quantitative easing, analysts said.

"The sharp decline in gold ETFs in February underscores the weakness in gold sentiment that has been prominent recently," UBS said in a note.

"The realisation over the coming weeks that there is still much uncertainty ahead and the Fed is more likely to stay the course as highlighted by Chairman Bernanke's comments yesterday should see some reversal in the recent ETF flows."

Physical buying in Asia slowed after gold climbed for four days straight.

Among other precious metals, platinum was trading at par with gold, having dipped into a discount for the first time in over a month in the previous session. Heightened risk aversion was hurting industrial commodities such as the autocatalyst metal.

Analysts said its rally to 17-month highs earlier this month had also left it overstretched.

Spot platinum dropped 0.9 per cent to $1,604.74. It slipped to a seven-week low at $1,577.49 an ounce on Tuesday.

Palladium was down 1.3 per cent at $733.50. Silver was down 0.9 per cent to $29.10. – Reuters




Tags: Gold | London | UK |

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