Gold prices rebounded on Monday from a two-week low hit late last week, but remained pressured by wariness over speculation European authorities may use their vast gold reserves to help euro zone states facing fiscal problems. Gold prices fell below $1,100 per ounce on Friday to their lowest level since February 25.
As investors unwound positions on speculation of further monetary tightening by China while uncertainty over Europe's sovereign debt worries spurred heavy futures liquidation. Germany's Bundesbank would oppose any government initiative to use its gold reserves as backing for a European Monetary Fund, a spokeswoman said.
German magazine Focus reported on Saturday that the finance ministry was considering the possibility of euro zone countries using their central banks' gold reserves to back such a fund. "A proposal from the finance ministry suggests pooling the gold reserves of the former central banks of euro zone countries in a stabilisation fund," Focus wrote.
"Gold prices are likely to be capped in the near term with worries about European central banks selling gold to help Europe's fiscal problems," said Kazuhiko Saito, chief analyst at Tokyo's Fujitomi Co Ltd. He said big European countries such as Germany and France each hold about 60 percent of their reserves in gold, and market players wondered what might come out of a two-day meeting of the European Union Economic and Financial Affairs Council starting in Brussels on Monday.
"Investors are seeking a new comfort zone at a lower level," he said. "Asian buyers continue to provide support below $1,100, but they are also quick to sell on rebounds in prices," he said. Spot gold inched up 0.4 percent to $1,104.00 an ounce as of 0200 GMT, against New York's notional close of $1,099.50. US gold futures for April delivery were at $1,104.20 an ounce, up 0.2 percent compared with $1,101.70 on the COMEX division of NYMEX.
Traders also cited a series of central bank policy meetings this week as making investors cautious about buying gold. The Federal Reserve is expected to repeat its promise to keep US borrowing costs exceptionally low for an "extended period" when it concludes a policy-setting meeting on Tuesday.
The Bank of Japan, which ends a two-day meeting on Wednesday, is under government pressure to further ease policy to help beat deflation and prevent a stronger yen from hindering the economy's recovery. Non-commercial net long US gold futures positions inched up 0.4 percent to 208,194 contracts in the week ended March 9 from 207,372 contracts a week earlier.
According to the weekly Commitments of Traders report published by the Commodity Futures Trading Commission. It was the highest in five weeks. As an increase in speculative positions slowed, investment flows has also paused. The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings stood at 1,115.511 tonnes as of March 12, unchanged from the previous business day. Holdings have stayed unchanged for three consecutive days.
The dollar reversed earlier losses to edge higher, and was up 0.1 percent against a basket of currencies. The dollar dropped to a one-month low against the euro and a two-week trough against sterling on Friday, as investors pared back large bearish bets on the two European currencies following strong euro zone economic data.