Gold neared two-week highs on Tuesday as an artillery clash between North and South Korea and Europe's debt crisis prompted safe haven buying and eroded the metal's traditional inverse link with the US dollar. The US currency reaped the benefit from the euro's decline, rising by over 1 percent against a basket of major currencies, while gold rose by as much as 1 percent earlier in the day to a session high of $1,379.95, before retreating to show a 0.7 percent gain on the day at $1,375.00.
US gold futures rose some 1 percent to $1,372.7. Gold's negative correlation to the dollar softened for the first time since last Thursday, echoing the events of May this year, when Greece asked for financial aid and bullion's relation to gold turned strongly positive as investors shed their holdings of euros. Natixis analyst Nic Brown felt that any boost for gold from events in Korea and even in the European Union were likely to play second fiddle to bigger picture issues like the dollar and global measures against inflation.
"I'm not sure the gold market is being pushed around by European credit concerns in the same way that it was earlier in the year," he said. Events on the Korean peninsula and Europe triggered a flight to quality by investors, as reflected by a rise in government bond prices and a pickup in the Swiss franc - another perceived safe-haven asset - against the euro.
North Korea fired scores of artillery shells at a South Korean island on Tuesday, killing two soldiers in a sharp escalation of hostilities between the two nations. In Europe, the euro came under pressure as fears grew that Ireland's debt crisis could spread to other weaker members of the eurozone such as Portugal and Spain and amid signs the Irish government will have trouble passing a crucial austerity budget.
German Chancellor Angela Merkel said on Tuesday Ireland's crisis was different to Greece's but just as worrying and the euro was in an "exceptionally serious" situation. Gold priced in euros was at 1,025.89 euros an ounce, up over 2 percent on the day, having broken through the 1,000-euro mark on Monday for the first time in a week. Traders in London also cited strong buying of gold futures related to the expiry of COMEX December options on Tuesday.
"There were some big strikes around $1,370 and that meant that up until 2.30 pm there was plenty of selling in the market around those levels, so that was putting a bit of a cap on it," one trader at a European bank said. Speculators in New York have cut their exposure to gold futures by 4 million ounces in the last month and holdings of gold in the world's largest bullion-backed exchange-traded fund, the SPDR Gold Trust, have fallen by 1.5 percent. With the US Thanksgiving holiday around the corner, investors are watching for a batch of data, as well as minutes from the Federal Reserve's meeting on November 2-3, where the Fed decided to launch its $600 billion bond purchase programme.
Spot silver fell by 1.5 percent to $27.45 an ounce, as the precious metals complex remained under pressure, although holdings of metal in the iShares Silver Trust, the world's largest physically-backed exchange-traded fund, hit a record high. Platinum fell by 1 percent to $1,643.74 an ounce, while palladium was down by 2 percent at $677.22.
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