Gold drifted higher on Friday to trade above the previous day's nine-week low, and analysts said the metal might recover on bargain hunting and physical buying. But larger-than-usual gold sales by European central banks in the past weeks might weigh on prices, they said.
"At some stage, we would expect the downside to fade a little bit, giving some room for an upside swing. You start to feel now that there is some hesitation in the selling," said Frederic Panizzutti, precious metals analyst at MKS Finance. "We would expect gold to bounce back from around these levels. The dollar remains a key factor," he said, adding physical buying was likely to be good.
Gold was quoted at $655.40/655.90 an ounce by 1428 GMT, against $653.20/653.70 in New York late on Thursday, when it fell as low as $651.30. "The fact that the speculative community is still holding relatively large long positions in gold adds an additional layer of downside risk if US dollar strength continues," Deutsche Bank said in a research note.
"We are maintaining our core bullish view on gold based on US dollar strength fading and new record lows being hit during 2007." "Investment funds are flowing out from gold, base metals and from other commodities because of the dollar's strength against the euro," said Tetsu Emori, chief strategist at Mitsui Bussan Futures in Tokyo.
"At the moment, the trend of the dollar is the key to gold. But gold could be put under bigger selling pressure if the euro drops below $1.34," Emori said. The dollar fell after a report showed an unexpected decline in US existing home sales in April, rekindling worries that a downturn in the US housing sector may have more room to run.
Traders said gold sales by European central banks under a five-year pact that started in late 2004 had dampened sentiment. On Tuesday, the European Central Bank said it sold 280 million euros of gold and gold receivables. Some analysts said the bank had accelerated sales recently to catch up with its slower sales pace early this year.
In May, the Bank of Spain sold 1.3 million ounces of gold from its reserves, after it sold another 1.3 million ounces in March. In April, the Bank of France disclosed that it had sold 105 tonnes of gold in 2006. In other metals, platinum fell to a five-week low of $1,267 an ounce, versus $1,280/1,285 in New York the previous day, while palladium was flat at $364/368. Silver rose 10 cents to $12.92/12.95 in New York.