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Gold slips as euro dips, inflation fear supports

LONDON - Gold edged down on Friday as the dollar’s recovery versus the euro prompted profit taking, pressuring the metal from a three-week high it hit in earlier trade.

However, prices remain firmly underpinned by investors’ interest in the metal as a haven as they worry about the outlook for inflation and dollar weakness in the wake of the U.S. Federal Reserve’s move towards quantitative easing.

Spot gold hit a peak of $966.70 an ounce, its firmest since Feb. 25. It had eased to $954.25/955.75 an ounce by 1043 GMT from $958.60 late on Thursday as the dollar recovered lost ground against the euro.

Prices have risen sharply since the Fed announced plans on Wednesday to buy $300 billion in longer-dated Treasuries, flooding the market with dollars and prompting a sharp drop in the value of the U.S. currency and a rise in inflation fears.

“When you look at the gold market, there is a huge dynamic in place, which is an increasing loathing of currencies,” said Nick Moore, an analyst at RBS Global Banking & Markets. “The only true currency, which is gold, is the beneficiary of that.”

“If central banks around the world are keen to avoid deflation, then by definition they must have inflation, and that plays straight into gold’s hands,” he added.

Gold has benefited from a sharply weaker dollar, which boosts interest in the precious metal as an alternative asset.

The dollar was heading for its biggest weekly fall in 24 years earlier in the session, though worries over the euro zone economy have since lifted it from lows versus the single currency.

Investor interest in gold remains firm, with the world’s largest exchange-traded fund, the SPDR Gold Trust, reporting a fresh 15.28-tonne inflow on Thursday which brought its holdings to a record.

Buying of gold by ETFs, which back the securities they issue with physical stocks of bullion, has formed a major plank of demand in recent months. SPDR alone has added 323 tonnes of gold to its reserves so far this year, against 17 tonnes a year ago.

Excess

Demand from ETFs is helping to mop up some of the excess supply in the market left over from a drop-off in jewellery buying. Jewellers in key markets such as India say the metal’s sharp price rise has hit sales hard.

It has also led to a surge in supply of scrap gold as consumers sell old or outdated jewellery to raise cash.

Barclays Capital said in a note it is raising its 2009 gold price view to $940 an ounce, citing the dollar outlook.

“Plans for further quantitative easing by the U.S. has seen the dollar nosedive,” it said. “In that environment, gold will shine.”

Among other precious metals, platinum rose to a near six-month high of $1,127.50 an ounce, boosted by dollar weakness and strength in the gold price.

The metal, a primarily industrial commodity used as a key component in autocatalysts, may also be benefiting from a shift in analysts’ attention from a strongly recessionary outlook in the wake of the Fed statement on Wednesday.

“Given the bullish sentiment in gold and silver and rising investment demand, we could see platinum target chart resistance at $1,265,” said James Moore, an analyst at TheBullionDesk.com.

Spot platinum was at $1,111/1,116 an ounce from $1,122.50, while spot palladium was steady at $203/208 an ounce from $203.50.

Spot silver edges down to $13.52/13.58 an ounce from $13.57.