Gold edged up on Thursday, arresting a near 2 percent fall the day before but still on course for its worst weekly performance in three months as growing investor optimism on the US economy boosted the dollar and riskier assets.
Investors have stuck with gold for now, pushing holdings of the metal in the world's largest exchange-traded products (ETPs) to record highs this week, while in Asia's purchasing hot-spots, the drop in price encouraged a revival in demand, particularly in top consumer India.
A sharp rise in US Treasury yields this week has also tempered gold, because of the knock-on effect on the dollar, which tends to gain in an environment of rising rates. Ten-year Treasury yields were set for their largest weekly rise since early July 2011 this week.
Spot gold rose 0.4 percent to $1,648.40 an ounce by 1537 GMT, having lost nearly 4 percent so far this week after the Federal Reserve issued a more upbeat outlook for the US economy, dousing expectations for further use of additional policy measures to keep rates low.
US gold futures for April delivery were up 0.3 percent at $1,648.60 an ounce. "Given that we've seen the probability of further quantitative easing reduced, profit-taking has weighed," Suki Cooper, an analyst at Barclays Capital, said. In focus for Friday is the weekly expiry of options on shares of the SPDR Gold Trust, the world's largest physically backed gold ETP.
Data from the Options Price Reporting Authority BBO shows most open interest lies at 160.0 puts, options that would give the holder the right, but not the obligation, to sell SPDR gold shares at a price of 160.0 by expiry on Friday, which is equivalent to a spot gold price of $1,647.00 an ounce. Shares in the trust were indicated at 160.1 by 1030 GMT, meaning those put options would be unprofitable should the spot gold price recover significantly from current levels by the time expiry rolls around. They would be in the money, however, if the spot gold price falls much more.
Gold has fallen around 8 percent since late February as funds appeared to have closed out of their bullish bets on worries the Fed has no intention to buy any more major assets to keep interest rates and borrowing costs low. The dollar rallied to an 11-month high against the yen and a one-month peak against the euro on Thursday on growing optimism about a US economic recovery and subsequent rises in US bond yields.
In theory, a firmer dollar hurts dollar-based commodities such as gold as well as industrial metals such as copper, which is weighed down by concerns about slowing demand from China, the world's largest consumer. "Sentiment is of course very bad. After slipping below $1,650, prices may go down further to $1,600," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, adding that a rebound would be capped at $1,675 to $1,680.
"Safe-haven (appeal) is forgotten for the time being. The demand is sluggish because of the strong dollar. Speculators dumped their gold," he said. But a Reuters poll found developed economies are forecast to pick up steam this year due to an array of ultra-loose monetary policies from major central banks and amid new signs of progress in the euro zone's debt crisis.
In India, local dealers reported a significant improvement in demand in the last two trading days as the gold price has fallen below $1,700 an ounce. In other precious metals, silver was up 0.7 percent on the day at $32.32 an ounce, having neared two-month lows on Wednesday on the US futures market, where prices fell by as much as 6 percent at one point in the day, closing 4 percent down. Platinum stood at $1,671.99 an ounce, pushing the premium to gold to nearly $30 an ounce. Palladium was at $697.00 an ounce.