Gold prices rose on Thursday as its fall to a near three-month low the previous day tempted some buyers back, but gains were capped by a rise in the dollar and fading hopes for more US monetary stimulus. Spot gold was up 0.6 percent at $1,628.34 an ounce at 1420 GMT. It briefly broke back above $1,630 an ounce as a drop in jobless claims pulled the dollar from its highs and stocks from their lows, but was unable to sustain the move.
Commerzbank analyst Daniel Briesemann said a countermove after the sharp price fall of recent days was to be expected, but said he expects prices to trade lower, possibly below $1,600 an ounce, after the current correction has run its course. "Gold is highly correlated to equities and commodities at the moment and as long as the equity markets and the commodity markets are going down, so is gold," he said.
Investors will be looking to the March nonfarm payrolls report from the United States on Friday for further clues on the health of the labour market. A spate of better-than-expected US economic data has curbed investor appetite for gold by raising expectations that quantitative easing will prove unnecessary, especially after Fed minutes on Tuesday suggested more monetary stimulus was unlikely.
Ultra-loose monetary policy, which keeps real interest rates and consequently the opportunity cost of holding gold low, helped push the metal to record highs in 2011. "Markets in general seem to be in risk-off mode as the Fed keeps quantitative easing on a back burner," Scotiabank analysts said in a note on Thursday.
"The fact this has given the dollar a boost is likely to be a headwind for gold and if we get a broad based sell-off then gold prices are likely to suffer as investors have to raise money against margin calls," they added. "As such, we would not be surprised to see a move down in gold, but as concerns about Europe's debt are resurfacing, this time in Spain, the downside may be limited and safe-haven buying may soon return with vigour," they said.
Spanish government bond yields rose further on Thursday after investors worried about the country's ability to meet budget targets held back at debt auctions the previous day, rekindling funding concerns for lower-rated euro zone states. Industrial output in Germany fell more than expected in February due to unusually cold weather, data showed on Thursday, tempering hopes Europe's largest economy will avoid a recession.
"In addition to Euro jitters potentially offering a 'prop' for gold, we also cannot rule out the possibility of the US economic recovery 'topping out', bringing the easing option back onto the table, and thus throwing another lifeline to the precious metal," INTL FC Stone analyst Meir said. Among other precious metals, spot silver was up 0.9 at $31.58 an ounce, spot platinum was down 0.1 percent at $1,593.94 an ounce, and spot palladium up 0.7 percent at $633.70 an ounce.
Loose underlying market conditions could prove tough for silver to overcome this year. "Silver prices did manage to get some lift in March, but overhead supply seemed evident above $33.30 an ounce," Scotiabank said in its report. "However, considering the market is in a supply surplus, global growth is subdued and the EU debt crisis had calmed down in March, perhaps this was not so surprising."
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