Gold firmed on Tuesday as the dollar slid to a one-month low against a basket of currencies after warnings from a Chinese foreign exchange official of the risks of holding too many dollars. Spot gold was bid at $1,545.29 an ounce at 1406 GMT against $1,543.05 late in New York on Monday, having earlier risen as high as $1,550. US gold futures for August delivery fell 60 cents an ounce to $1,546.60.
Pradeep Unni, senior analyst at Richcomm Global Services, said soft US economic data last week had raised questions over the possible extension of quantitative easing. "This, along with Chinese comments of excessive dollar holding hurting them has turned the US dollar a painful asset to hold," he said. "Under these circumstances, bullion would be the natural preference and hence should gain further."
The head of the international payment department at China's foreign exchange regulator said on Tuesday Beijing should guard against risks from excessive holdings of dollar denominated assets, adding to its weak outlook. The US currency has already struggled this year against expectations the Federal Reserve will keep rates low for a protracted period to safeguard economic growth.
Gold tends to have an inverse relationship to the dollar, because it becomes cheaper for holders of other currencies when the US unit weakens, and it is sometimes bought as an alternative asset. Expectations the European Central Bank will be quicker to raise interest rates than the Federal Reserve has led the euro to rise nearly 10 percent relatively to the dollar this year. "We think we're going to break above $1,550 and test the all-time highs," said Standard Bank analyst Walter de Wet.
"Some of that is on expectations of more euro strength relative to the dollar following the ECB meeting on Thursday. We think the ECB is going to be fairly hawkish." Wall Street's fall to 2-1/2 month lows after last week's soft non-farm payrolls data supported expectations for an extended period of record low interest rates in the United States. Fed Chairman Ben Bernanke's speech later in the day on the US economic outlook will be closely watched for clues as to future policy. Bernanke will speak at 1945 GMT in Atlanta.
Physical gold demand is also holding up strongly despite near-record prices, analysts said, particularly in the Asian markets, where appetite for gold has typically been sharpest. UBS analyst Edel Tully said in a note that purchasing in the world's biggest gold market, India, was becoming less seasonal.
"Last week... our sales to the region were somewhat above average - not spectacularly so, but in the past we would have expected gold sales to be running well below average at this time of year, particularly with the gold price above $1,500," she said. "As gold enters what has traditionally been its season of weakest physical demand, this is positive news."
Precious metals consultancy GFMS meanwhile said on Tuesday it expected gold, silver, platinum and palladium prices to retain upside potential in 2011, with negative real interest rates remaining the principal driver. Silver was at $37.05 an ounce against $36.73, tracking gains in gold. Platinum was at $1,819.49 an ounce against $1,805.30, while palladium was at $802.47 against $784. Palladium prices earlier hit three-month highs at $807.22 an ounce, with traders reporting buying of the metal for exchange-traded funds.
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