Gold prices rise after hitting 2.5-month low

Precious metal remains vulnerable to further losses as investor demand remains slack

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Gold edged up on Wednesday from the 2-1/2 month low it hit in the previous session as a softer tone to equities and the dollar helped arrest its slide, though it remained vulnerable to further losses as investor demand remained slack.

The metal hit its lowest since mid-February on Tuesday after U.S. housing data beat expectations, boosting confidence in the U.S. economic recovery and lifting stock markets, which hurt gold’s appeal as an alternative investment.

It found support at its 100-day moving average at $1,277 an ounce, however, and turned higher after mixed euro zone data resulted in a retreat in European shares and the dollar.

Spot gold was up 0.1 percent at $1,284.50 an ounce at 1245 GMT, while U.S. gold futures for June delivery were up $4.00 an ounce at $1,285.10.

Prices could turn lower once more if there is more positive economic data from the United States, analysts said.

“In the second quarter, our forecast is that gold will average about $1,250 an ounce,” Natixis analyst Bernard Dahdah said. “It’s mainly U.S. data that is going to lead to a lower price. The more positive it comes out, the more it will drag gold towards the $1,250 level, and keep it there.”

Strong data supports expectations that the Federal Reserve will continue tapering the extraordinary stimulus measures it put in place during the financial crisis. The prospect of tapering was a key factor in gold's 28 percent drop last year.

It is also likely to support the dollar, which tends to pressure gold, which is priced in the U.S. unit.

“Our base case scenario for a U.S. dollar-supportive spring bounce in U.S. data remains on track, with April Richmond Fed surprising to the upside... and the decline in March existing home sales being smaller than expected,” BNP Paribas said in a note.

“Markit April manufacturing PMI and March new home sales are due today, with our economists expecting homes sales to have recovered from inclement weather conditions.”

Physical demand soft

Physical demand in Asia, which tends to provide some support at lower price levels, failed to emerge after Tuesday’s drop as buyers expect more price declines, dealers said.

“I thought some demand would emerge when prices fell below $1,300, but I was surprised to see no strong buying interest,” said one dealer in Hong Kong.

Demand has been quiet in number one buyer China as a weaker yuan made it more expensive to buy dollar-denominated gold. China’s yuan hit a 16-month low against the dollar on Wednesday.

Shanghai prices were at a premium of about $1 an ounce to spot prices on Wednesday, flipping from a discount overnight.

In other Asian countries, premiums were either stable or slightly lower from week-ago levels.

Investment demand also remained weak with the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, seeing sharp outflows in recent days. Last week alone, the fund’s outflows totalled 9.3 tonnes, erasing all the gains made in the year.

Among other precious metals, silver was up 0.3 percent at $19.44 an ounce, while spot platinum was up 0.4 percent at $1,398.25 an ounce and spot palladium was up 0.3 percent at $782.22 an ounce.

Talks aimed at ending a three-month strike in South Africa’s platinum sector resume on Wednesday after the world’s top producers and union AMCU spent Tuesday haggling over an offer tabled last week by the companies.

The strike is already the longest and most costly for South Africa’s mines in living memory.

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