Gold's four-session rally ran out of steam in Europe on Thursday with prices consolidating early gains above $1,620 an ounce as investors took profits, despite a seemingly market-supportive bounce in the euro. Dealers said volatility was magnified by volumes on the US COMEX exchange, as part of broader market positioning ahead of an election in Greece on Sunday which could decide if the country stays in the euro zone.
The euro rose on short-covering while the fall in gold left prices broadly steady on the day. This week's gains have been firmly underpinned by speculation that the Federal Reserve would unveil a fresh round of quantitative easing, which roughly translates into printing money, after weak retail and inflation data on Wednesday. "Gold has been quite volatile, having initially had support this week from US data, but it's quite possible that the markets are getting tired of second-guessing the Fed," HSBC analyst James Steel said.
Spot gold was broadly flat on the day at $1,617.14 per ounce - having earlier hit a session high of $1,627.39 - while US gold futures for August delivery were down 60 cents at $1,618.80. Volatility on the market rose ahead of this weekend's Greek elections.
The conservative New Democracy party, which wants to soften the bailout's austerity measures without risking an open clash with Europe, is running neck-and-neck with SYRIZA, which wants to ditch the deal with the European Union and International Monetary Fund.
"The result of the vote will be very important not just to gold but across the whole financial markets next week," RBS analyst Nikos Kavalis said. "If we get a disappointment, we can expect a massive sell-off across the board. Concerns over the euro zone debt crisis are rife. Spanish 10-year government bond yields hit 7 percent for the first time after Moody's cut the country's credit rating to just one notch above "junk".
"German bund yields have... been rising, behaving more like periphery bonds rather than a safe haven. The spread versus UK gilts - another European sovereign bond that has been considered safer than the periphery - has narrowed substantially this week," UBS said in a note. While it is too early to conclude that German bunds are losing their safe haven status, UBS said, "such a scenario... would mean investors would be on the lookout for new 'secure' places to park their money. Given the much-reduced list of alternatives, gold would be one of the top options."
Europe's top shares extended earlier falls after US jobless claims rose. Stocks were wounded earlier after Moody's downgraded Spain, exacerbating the cautious mood among investors who are bracing themselves for the outcome of the Greek election over the weekend.
Demand for physical gold in Asia stayed sluggish while higher gold prices lured some selling, but most market participants preferred to stay on the sidelines as they waited for a clear direction on spot prices. India's gold and silver imports were down 52 percent year-on-year in May, according to a senior trade ministry official, citing provisional data that showed the country's trade deficit widened over the previous month. Among other precious metals, silver was down 0.3 percent at $28.85 an ounce, while spot platinum was up 1.3 percent at $1,477.74 an ounce and spot palladium was up 0.2 percent at $618.40 an ounce.
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