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Gold steady, supported by ETF buying

LONDON - Gold was little changed in Europe on Monday, consolidating after last week's more than 3 percent rise, with strong demand for physical investment products such as gold-backed exchange-traded funds supporting prices.

The closure of the U.S. markets for the Presidents Day holiday is likely to keep traders on the sidelines this session.

Spot gold XAU was little changed at $940.20/942.20 an ounce at 1233 GMT from $939.40 late in New York late on Friday.

Bullion prices rose nearly $30 an ounce last week as concern over the economic outlook and turmoil in the financial sector prompted investors to buy the metal as a haven from risk.

Wolfgang Wrzesniok-Rossbach, head of sales at precious metals group Heraeus, said however that with jewellery demand soft, gold was likely to consolidate before its next leg higher.

"The trend for the next hours and days is probably a little lower before we make a new attempt higher," he said. "Between $935 and $930, there is danger that the metal will break (its) recent uptrend, and then we might head a little lower."

But turmoil in the financial markets and economic worries are still supporting demand for gold as a safe store of value.

Equities fell on Monday after a lack of concrete action following a G7 meeting this weekend and as data showed Japan is sinking deeper into recession. Japan reported its worst quarterly contraction in 35 years on Monday.

Fear-driven demand for investment products is helping balance a drop-off in jewellery buying in traditional gold markets such as China, India and the Middle East.

The world's largest gold-backed ETF, New York's SPDR Gold Trust, said its holdings rose more than 15 tonnes to a record 985.86 tonnes on Friday. The trust's gold holdings are up more than 205 tonnes or 26 percent so far this year.

But India's gold demand was slack on Monday as high prices put traders off purchases. "Gold demand is very sluggish, and everybody is waiting for a dip to $900-$920," said a dealer at a state-run bank in Mumbai.

The head of the Bombay Bullion Association said on Friday that there have been no gold imports into India so far in February.

Scrap supply from India and China is rising, however, as the climb in spot prices prompts existing gold holders to cash in gains.

DIRECTION

Gold took little direction from its usual main external drivers, the dollar and oil prices.

The dollar gained ground versus the euro as grim Japanese data intensified global recession fears and encouraged buying of safer assets.

Gold typically trades in the opposite direction to the U.S. currency, as it is often bought as a hedge against dollar weakness. However, both are currently benefiting from rising risk aversion.

Oil prices were steady just above $37 a barrel, pausing after Friday's 10 percent rally, as investors awaited further direction from the signing of a U.S. stimulus package later this week.

Among other precious metals, silver also took support from strong investment.

Holdings of the biggest silver ETF, the IShares Silver Trust , were at a record 7,607 tonnes on Friday. Spot silver edged down to $13.53/13.61 an ounce from $13.62.

Platinum and palladium remain under considerable pressure from the sluggish outlook for the car industry, a major user of the metals as a component in catalytic converters.

President Barack Obama has decided to launch a government task force for restructuring the struggling U.S. auto industry, a senior administration official said on Sunday.

Platinum edged up to $1,065/1,070 an ounce from $1,059.50, while palladium was at $215/220 an ounce from $214.

London-based ETF Securities said holdings of its palladium-backed exchange-traded commodity rose 30 percent last week as a recovery in platinum and palladium prices cheered investors.