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Gold rises with dollar softness, investors wary

Gold rose on Wednesday, drawing strength from a softer dollar and overlooking evidence of waning investor appetite for the metal, although gains in the price were likely to be moderate ahead of the release of US central bank meeting minutes.

Spot gold was up 0.5 percent on the day at $1,575.54 an ounce by 1220 GMT, while US gold futures fell 0.2 percent to $1,576.00 an ounce.

The U.S. currency was still around its highest in nearly two years against the euro, which has taken little comfort this week from the slow progress of European leaders in solving the debt crisis.

Hopes for a quick ruling from Germany’s Constitutional Court on whether the European Stability Mechanism (ESM) and planned changes to the euro zone’s budget rules were compatible with German law were dashed after it emerged the decision could take several weeks.

With few cues for gold coming from Europe, the focus in the market shifted to the United States, where the Federal Reserve releases the minutes from its June policy meeting later.

Traders will scour the statement for any sign of greater dovishness among the rate-setting committee members that could be interpreted as raising the chances for the Fed to use additional policy tools to boost growth.

Commerzbank analyst Daniel Briesemann said he believed the likelihood of getting evidence of greater pessimism from the Fed members was fairly slim and the gold market should therefore offer only a muted reaction.

“The dollar is the major influence on the price of gold at the moment, it is the reason gold is up today,” Briesemann said.

“I don’t think the FOMC minutes will have an effect at all. The Fed have already stated their fears about the global economy and at the last FOMC meeting, they already highlighted (that).”

The correlation between gold and the dollar index is close to its most negative in nearly two years, around -0.69, meaning the two assets are more likely to move inversely to one another now than they were at the start of July when this correlation was closer to -.025.

“We expect higher gold prices towards the end of year, but in the shorter term, and because gold is not behaving like a safe-haven and is trading more in line with risk assets like cyclical commodities, I see more risk to the downside at the moment,” Briesemann said.

The central bank has pledged to leave US benchmark interest rates near zero until at least late 2014 and has already spent over $3 trillion in the last 3-1/2 years in direct purchases of government bonds to pin down borrowing rates.

That has not dampened the speculation among investors that the Fed will embark on a fresh round of bond-buying to invigorate what has been a patchy economic recovery.

Low interest rates, particularly on the US dollar, create a more favourable environment for investing in gold, as it can compete more effectively for investor cash when loose monetary policy cuts the yield on bonds and can undermine stock returns.

Since the Fed initiated its campaign of anchoring rates by purchasing Treasuries, a tool known as quantitative easing, in late 2008, the gold price has more than doubled in value.

Gold’s propensity to trade in line with higher-yielding, higher-risk assets has stripped nearly 13 percent off the price in 3-1/2 months and investors are becoming increasingly wary.

Holdings of gold in the world’s largest exchange-traded products (ETPs) fell to their lowest since mid-June by Tuesday’s close, after having fallen by nearly a quarter of a million ounces in two trading days, their largest two-day drop since May this year.

The bulk of the outflows are coming from the SPDR Gold Trust , the world’s largest gold ETP, which has shed 333,500 ounces in the last three weeks. “Gold prices tend to be highly sensitive to changes in monetary policy. A more accommodative monetary policy has historically been positive for gold,” James Steel, an analyst at HSBC, said in a note.

“In the near term, we believe gold prices will be more influenced by the tone of the FOMC minutes and we expect prices to rally if the minutes are seen to imply further easing.

Consumer demand for gold has also been subdued. In India, where the government in the world’s largest bullion buyer has raised import duties and taxes on the metal, any weakness in the rupee against the dollar suppresses purchases.

Local dealers have reported fairly weak demand this week. Silver, which rose by 0.7 percent on the day to $27.00 an ounce, has underperformed gold consistently since late February.

The gold/silver ratio - the number of ounces of silver needed to buy one ounce of gold - has risen to 58.3 from a six-month low of 48.0 in late February.

The silver price is also trading close to its lowest levels this year, having echoed the persistent weakness in gold to fall by nearly a third in value since the end of February.

“Silver remains above the key support zone of $26.40/26.08 ... Like gold, it will have to break above the resistance line developing since March at 28.00/28.20 to spark a sustained rally,” Societe Generale technical analyst Stephanie Aymes said in a note.

Platinum rose 0.1 percent on the day to $1,419.25 an ounce, while palladium rose 1.1 percent to $577.00.