Gold steadied near $1,420 an ounce on Tuesday as violence in the Middle East boosted the metal's safe-haven appeal, but investors remain cautious towards the metal amid expectations monetary policy is set to tighten. Spot gold was bid at $1,418.22 an ounce at 1444 GMT against $1,419.50 late in New York on Monday, having earlier fallen as low as $1,410.85. US gold futures for April delivery fell $1.50 an ounce to $1,418.40.
"I think the market is beginning to believe that there will be no QE3," said Saxo Bank senior manager Ole Hansen. "We have geopolitical unrest, rising inflation, weaker dollar and all of these have failed to make gold fly like last year." St Louis Federal Reserve Bank president James Bullard said on Tuesday the US economy was strong enough to curtail the Fed's $600 billion bond-buying program, while ECB chief Jean-Claude Trichet said on Monday the inflation rate in the eurozone was "durably" above the bank's target.
Growing expectations US and eurozone monetary policy may tighten have weighed on gold prices after unrest across the Middle East and North Africa pushed gold to a record $1,447.40 an ounce last week.
Violence is continuing to rage in Libya after months of unrest in North Africa. Muammar Qadhafi's better armed and organised troops reversed the westward charge of Libyan rebels as world powers met in London to plot the country's future without the "brother leader". US Ambassador to the United Nations Susan Rice said on Tuesday that the Obama administration has not ruled out arming Libya's rebels as an option for trying to end Muammar Qadhafi's 41-year rule.
Among other commodities, oil prices turned positive on Tuesday as Qadhafi's troops halted a rebel advance, raising doubts among investors over how quickly the conflict in OPEC member Libya could be resolved. But the prospect of tightening monetary policy is casting a shadow over the gold outlook. Gold tends to benefit from low real interest rates, as they reduce the opportunity cost of holding non-interest bearing bullion.
"We expect that the strengthening US economy combined with the end of quantitative easing by the US Federal Reserve will lead to gradually rising US real interest rates in 2011," said Goldman Sachs in a report on Tuesday. "Should real rates return to their February levels of 1.3 percent, we would expect a slightly slower gold rally than currently embedded in our forecasts for the second half of 2011, which currently stand at $1,565 and $1,690 in six and 12 months, respectively."
Investment interest in products such as precious metals exchange-traded funds has been soft this quarter, with holdings of the largest gold ETF, New York's SPDR Gold Trust, on track for the biggest quarterly decline since the fund's launch. Holdings of the largest silver ETF, the iShares Silver Trust, are on track for a small rise, however, recovering after posting their biggest ever monthly outflow in January. Silver slipped 0.5 percent, underperforming other precious metals in its second straight session of losses, to $36.94 an ounce from $37.12. Platinum was at $1,741.99 an ounce against $1,745.70, while palladium was at $744.50 against $742.03.
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