Gold recovers in Europe

Gold recovered some lost ground on Monday as the euro swung back into positive territory against the dollar and stock markets pared losses, but investors remained cautious towards the precious metal after last week's hefty price drop. Spot gold was down 0.5 percent at $1,703.50 an ounce at 1452 GMT, up from an earlier low of $1,694.24 an ounce. US gold futures for April delivery fell $5.50 an ounce to $1,705.30.
Spot prices fell 3.9 percent last week, their worst weekly performance since mid-December, after Federal Reserve chairman Ben Bernanke gave no further hints, in a key speech, of a third round of quantitative easing in the United States. It retreated only briefly below $1,700 an ounce this morning, however, running into strong support from physical buyers and expectations that the low interest rate environment could eventually support much higher prices.
"Gold was at quite a high level relative to the dollar index before this latest correction, so we have come back to more middle-of-the-road levels, from that perspective," said Macquarie analyst Hayden Atkins. "I don't think there has been huge psychological damage done that would push gold lower from here," he added. "I still think the trajectory for the dollar is lower in the balance of the year, and that should be supportive.
"Gold ran quite hard against a relatively stable currency through February, so I think it has got good support here." Although extreme risk aversion was a key factor lifting gold last year at a time when the dollar was strengthening, it has since re-established its usual inverse relationship to the US unit as investor appetite for the dollar as a safe haven outweighed that for gold, and as panic in the markets subsided.
The dollar retreated on Monday after earlier strengthening against the euro, which came under pressure from concerns over Greece's progress on completing a huge debt restructuring deal and poor euro zone economic data. European shares also pared losses, having fallen in early trade after euro zone services sector PMI data missed expectations and nerves grew before a Thursday deadline for investors to voluntarily take part in Greece's debt swap deal.
Analysts say while gold is likely to consolidate in the short term, in the longer run it remains firmly underpinned by the United States' ultra loose monetary policy, portfolio diversification, and strong physical demand from Asia. "Negative real interest rates and accommodative monetary policy were and remain the key drivers of investment demand," Morgan Stanley said in a note. "Bernanke's testimony did nothing to remove this benefit."
Money managers, including hedge funds and other large speculators, raised bullish bets in gold to their highest in five months in the week of February 28, according to data from the US Commodity Futures Trading Commission on Friday. Asian jewellers and other physical gold buyers were still expected to be interested in gold at current price levels, which are down sharply from three-month highs around $1,790 hit last week before the sell-off.
Gold's fundamental drivers remain intact, but more consolidation is expected in the foreseeable future. "In our meetings last week, factors like the explosion in the balance sheets of the ECB, BoJ, BoE and the Fed and large exports of gold from Hong Kong into China in Q4 were regularly cited as reasons to view gold favourably this year," said UBS in a note. "And we heard more mention of rising inflation expectations than we have for some time."
"Yet the macro community appears to be engaged in a waiting game, with no one willing to take the first step," it added. "It seems the best thing gold can do right now is consolidate in the low $1,700s and inspire some confidence that a floor is nearby." Silver was down 0.2 percent at $34.38 an ounce. It also fell last week, but less dramatically than gold. Platinum was down 1.8 percent at $1,662.49 an ounce, while palladium was up 0.3 percent at $701.97 an ounce.