Gold retained gains from a two-day rally on Tuesday, supported by a slide in the dollar, although a slump in oil prices and uncertainty over the pace of future US interest rate hikes capped the metal's advance. While prices drew support from a big rise in assets of the top gold exchange-traded fund (ETF) late last week, a resumption in outflows this week indicated investors remained cautious.
Spot gold was little changed at $1,079.20 an ounce by 0648 GMT, after gaining 2.5 percent in the last two sessions. The metal got a boost on Monday as the dollar fell after data from the Chicago Federal Reserve suggested the US economy grew at a below average pace in November. "The jump in gold-ETF demand is impressive after the string of losses over the past couple of years, but the market will likely need to see further accumulation for the rally to be extended," said HSBC analyst James Steel.
"A major stumbling block for a further gold rally is oil, and commodity prices in general," he said, adding that oil is a powerful drag on gold. Crude oil slid to its lowest levels since 2004 on Monday and more declines could ignite deflation fears. Bullion is often seen as a hedge against oil-led inflation.
SPDR Gold Trust, the world's top gold ETF, saw its assets rise by nearly 19 tonnes on Friday, the first increase in two months and the biggest in four years. But that was followed by outflows of three tonnes on Monday. Holdings of the fund had hit a seven-year low earlier in the month, as investors positioned themselves for higher interest rates in the United States. While persistent inflows into the fund can boost gold prices, a further slump in oil could undermine any rally.
Also in focus was the pace of the Fed's future rate hikes. The Fed last week raised US interest rates for the first time in nearly a decade. Investors fear higher rates could dent demand for non-interest-paying gold, while boosting the dollar. The Fed's promise of gradual rate hikes in coming months means the central bank will not raise rates at every meeting, Atlanta Fed President Dennis Lockhart said on Monday. The more probable pace of upcoming hikes "will be more like every other meeting," he said.