Gold built on its earlier gains on Friday after Germany dispelled some of the doubt brewing among investors about the ability of European leaders to definitively tackle the debt crisis, which cut the dollar's advantage over the euro. Disagreement between Germany and France, the biggest contributors to the eurozone bailout mechanism, over how to structure the fund to effectively stem the spread of the crisis has prompted investors to attach a diminishing chance of a resolution any time soon.
Gold rose to session highs after sources at the German government there are no serious differences between Germany and France and said banks' recapitalisation should be decided at a meeting of EU finance ministers on Saturday, thereby boosting the euro against the dollar.
Gold has increasingly performed like a risk-linked commodity and seen its correlation to European stocks reach its strongest in six months and that with copper rise to an 11-month peak. Yet it has seen strong demand from Asian consumers, which has pushed premiums to their highest since the start of the year.
Spot gold was last quoted up 1.3 percent on the day at $1,638.99 by 1234 GMT, but set for a 3.0 percent fall this week. "Gold is moving in line with other commodity assets and equities on a more positive sentiment about Europe," said Credit Suisse analyst Tom Kendall.
"How it will move depends on the headlines on Europe that we will see in the next few days. Buyers are still on the downside. It will take a little bit longer before we can see it move out of the $1,600-1,700 range" Highlighting the investor pull out of gold this week, the price of bullion in most major currencies has fallen this week between 2.5 and 4.0 percent, while traded volumes in the most-active US gold futures contract have run as much as 55 percent below their 30-day rolling average so far this month.
This month, global gold ETF holdings are set for their largest net increase in three months, having risen by more than 170,000 ounces to 67.229 million ounces. Gold's safe-haven properties have taken a backseat to those of the dollar as investors have shunned euro-denominated assets, which in turn has posed a stiff headwind to the bullion price, as this tends to benefit from a weaker US currency.
"The question in everyone's mind is of course: 'how long will this phase last?' No one can know for sure, but we can identify at least two potential catalysts to watch that could help gold to reclaim its safe-haven status," wrote UBS analyst Edel Tully in a note, adding the catalysts were renewed dollar weakness and a breakdown in the correlation of gold with risk.
Silver, which can move in lockstep with gold but more frequently tracks base metals, has fallen 4 percent this week. It was last up 2.0 percent on the day at $31.11 an ounce. Palladium was last up by nearly 5 percent on the day at $612.25 The price is still down 1.0 percent this week, as concern has increased over the outlook for demand, particularly following a soft read of Chinese economic growth, which is key for car sales in the world's largest auto market. Palladium relies heavily on China as a source of demand for the metal in catalytic converters fitted in gasoline-powered vehicles. Platinum was last up 0.9 percent at $1,505.0 an ounce.
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