Gold steadied on Tuesday as traders weighed a buoyant dollar against a deepening political crisis in Italy that provoked a second day of heavy selling on European financial markets. Italy's president set the country on a path to early elections on Monday, appointing a former International Monetary Fund official as interim prime minister with the task of planning for snap polls and passing the next budget.
Investors fear repeat elections - which could take place as soon as August - might serve as a quasi-referendum on Italy's role in the European Union and euro zone and strengthen the country's eurosceptic parties even further. Gold, seen as a safe have, often gains from political turmoil. But keeping the metal's upside in check, the events in Italy pushed the dollar to a 10-month high versus the euro, making dollar-priced gold costlier for non-US investors.
Spot gold was 0.1 percent lower at $1,295.58 per ounce at 1410 GMT, while US gold futures for June delivery fell 0.7 percent to $1,295.30. "Gold is struggling to go anywhere right now, the European situation is quite serious and the market is certainly running scared. On the back of that we would have expected to see gold higher, but it is being kept back by dollar strength," said Ole Hansen, head of commodity strategy at Saxo Bank.
Short-dated Italian bond yields, a gauge of political risk, soared to their highest since late 2013 in their biggest move in 26 years, weighing on gold, which is a non-yielding asset. Elsewhere, markets are awaiting US inflation data due this week that could provide clues to future interest rate increases ahead of the June Federal Reserve policy meeting.
The US currency is heading for its biggest monthly gain in 1-1/2 years. "Beyond politics, we still see the US rate cycle and US dollar in the driving seat for gold. This should keep a lid on prices for now and supports our short-term neutral view," Julius Baer analyst Carsten Menke said in a note. Adding to the uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of confidence on Friday.
On the Asian geopolitical front, US President Donald Trump and Japanese Prime Minister Shinzo Abe discussed North Korea by telephone on Monday and confirmed they would meet before an expected US-North Korea summit. Spot silver was down 0.5 percent at $16.40 an ounce. Platinum was up 0.5 percent at $905.60 an ounce and palladium was up 0.1 percent at $986.97 an ounce.
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