Gold changed course to rise in late European trade on Wednesday as the dollar declined against major currencies after early gains, analysts said. Spot gold rose as high as $676.40 an ounce after falling to $669.50 earlier. It was quoted at $676.10/676.60 at 1439 GMT, against $672.10/672.90 late in New York on Tuesday.
"To some extent it's dollar-driven, but gold seems to be holding particularly well in spite of the fact that there is clear evidence of central bank selling," said Peter Hillyard, head of metals sales at ANZ Investment Bank.
"I am nervous at these levels. If this market is up purely on a weaker dollar, it might be vulnerable to the downside. Gold has to do a lot of work between now and the next seven dollars and if it breaks through $682, then we could talk about $700."
The dollar fell against major currencies, although a US Federal Reserve statement cooled expectations for a near-term interest rate cut and boosted stocks and other riskier assets. The statement released on Tuesday did little to change a view that yield spreads will keep moving against the greenback.
David Holmes, director of precious metals sales at Dresdner Kleinwort, said there was scope for additional gold buying as it was trading above its recent pivot of $665 and bullish positions on the futures markets had fallen sharply.
"But I don't think the timing is right ... We are in the middle of summer doldrums to some extent. The gold price is actually very well positioned for a rally in the later part of the year," Holmes said.
A weaker dollar makes gold cheaper for other currency holders and often lifts bullion demand. Analysts noted heavy gold sales by central banks, but said that long-term players remained positive about gold's future and invested more in exchange traded funds (ETFs).
The Bank of Spain sold 0.8 million troy ounces or 24.8 tonnes of gold in July. Between March and May, the central bank sold 3.5 million ounces of gold but it took a break in June. Analysts said the bank has sold 134 tonnes so far in 2007.
According to industry-funded World Gold Council, European central banks have so far sold 358 tonnes of gold in the third year of the Central Bank Gold Agreement (CBGA), against an annual limit of 500 tonnes. The year ends in late September.
Italy's Prime Minister Romano Prodi said he was pleased there was a discussion on possible sale of some of the country's gold reserves. "Central bank sales are still creating some negative sentiment and with only a few weeks left of the current year of the CBGA, banks are likely to remain on the offer," said James Moore, analyst at TheBullionDesk.com.
"Investment demand is still strong, though, as reflected by the rise in ETF holdings, and is likely to provide scaled down support in the coming sessions, but overall with volumes quite thin the metal is likely to remain rangebound."
UBS Investment Bank said six key gold ETFs added about 1.16 million ounces in July to lift total holdings to 22.5 million, a new high and up 2.41 million from the start of the year.
Platinum rose to $1,284/1,288 from $1,281/1,284 an ounce in New York, while silver was up at $13.14/13.18 an ounce, against $13.05/13.10. Palladium rose $2 to $361/365.
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