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Gold takes a breather after rally to 11-mth high

However, traders say further stock market weakness in the United States, the world’s largest economy, or bad news from the financial sector could spark another sharp rise as investors seek a safe place to put their money.

Spot gold was at $987.10/989.10 an ounce at 1340 GMT from $990.95 in New York late on Monday.

“We are going to be in a range of $975 on the downside and $1,005 on the upside, in a bit of a reconciliation after the sharp rally we saw last week,” Afshin Nabavi, head of trading at MKS Finance in Geneva, said.

“The banking crisis is continuing, and everyone was hoping we had seen the bottom as far as equities were concerned, but that doesn’t seem to have been the case. Gold should continue to benefit from that.”

Traders are eyeing equities after a slide in U.S. stocks to 12-year lows lifted gold to session highs on Monday and falling markets pushed gold over $1,000 an ounce on Friday.

Europe and Asia joined Wall Street’s sell-off on Tuesday, sending world stocks to a near six-year low.

Holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, held at a record near 1,029 tonnes on Monday. But that was their third straight session without new inflows.

“We do not believe this is anything to cause acute concern as we are continuing to see heavy investment demand into physical gold out of our Swiss sales desks,” UBS strategist John Reade said.

“But if the ETF inflows do not start again within a day or two, some traders may attempt to test the downside in gold.”

The dollar weakened against the euro but climbed to a three-month high against the yen, supported by concerns over the outlook for banks and the global economy.

The other main external driver of gold prices, oil, steadied after earlier losses as investors mulled the impact of OPEC supply cuts.

Traders are also awaiting further news on U.S. measures to shore up the ailing financial sector, after sources reported the government is set to take a bigger stake in Citigroup and inject more cash into insurer AIG.

Loss

AIG looks set to make the biggest quarterly loss in corporate history and could seek more aid despite the billions of dollars already committed to it.

U.S. Federal Reserve Chairman Ben Bernanke is due to testify before Congress on monetary policy later on Tuesday, an event which will be closely watched. In the longer term, financial market instability is expected to provide firm support to gold.

In supply news, South Africa’s Chamber of Mines said the country’s total gold mine production fell 13.6 percent to 220,127 kilograms in 2008, and 10.7 percent year-on-year in the fourth quarter.

Output had been hit by the impact of the electricity supply crisis early in the year and lower average grades, it said.

Among other precious metals, spot silver was steady at $14.43/14.49 an ounce from $14.41.

Holdings of the iShares Silver Trust, the world’s largest silver-backed ETF, rose 2 percent or 153 tonnes to a record 8,180 tonnes on Monday.

“The metal continues to draw fresh buying as a proxy for gold,” said Barclays Capital in a note.

Spot platinum was steady at $1,067.50/1,072.50 an ounce from $1,071, while spot palladium was at $201.50/206.50 an ounce from $195.50.

Earlier it climbed more than 5 percent in a correction after the previous session’s 8 percent fall.