Gold inches up on Asia demand; firm dollar caps gains

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Gold rose for a second straight session on Tuesday, buoyed by strong physical buying in Asia after traders in China returned from a week-long break, but the lack of interest from Western investors and a firm dollar kept a lid on gains.

Gold dropped by a steep 3 percent last week - biggest such drop in nine months - and Chinese traders rushed to pick up bargains when they resumed business this week, sending volumes on Shanghai Gold Exchange to record highs on Monday.

But the frenzy can be short-lived, traders cautioned.

"We have seen very good physical demand from Southeast Asia and China," said Yuichi Ikemizu, head of commodity trading, Japan, at Standard Bank.

But the strong interest from Asia did not translate into a quick rebound in prices, as enthusiasm from investors outside the region has cooled due to an improving global economic outlook that dims gold's safe-haven appeal.

"Asians are buying, but it is offset by the selling from funds in the Western market," Ikemizu added.

Speculators cut their net long positions in US gold to 70,250 contracts in the week to February 12, the lowest level since December 2008, down more than 30 percent from the end of 2012, data from the U.S. Commodity Futures Trading Commission shows.

Spot gold rose 0.3 percent to US$1,614.56 an ounce by 0254 GMT, off a six-month low of $1,598.04 hit late last week. US gold had also gained 0.3 percent, to US$1,614.50.

A firm dollar, however, capped gains.

The dollar rose to its highest against a basket of currencies in more than a month, putting pressure on commodities priced in the greenback by making them more expensive for buyers holding other currencies.

Spot gold could drop to US$1,592 an ounce during the day after a moderate consolidation in a narrow range of US$1,606.83-US$1,618, Reuters market analyst Wang Tao said.  "Investors would rather put money elsewhere when the U.S. is recovering and the euro zone economy seems to be on the mend," said Chen Min, an analyst at Jinrui Futures in the southern Chinese city of Shenzhen.

"Chances are small that prices will rally soon as the sentiment has turned bearish, and we may see the decline of prices into mid-year slack consumption season."

Chen expected gold to drop to as low as US$1,500-US$1,550 by mid-year.

Investors will closely read the minutes from the latest policy meeting of the US Federal Reserve, due Wednesday, which could shed light on that central bank's attitude to monetary stimulus, which was a key driver behind gold's rally in recent years.

Violence in South Africa's platinum sector may support prices of the metal that is mainly used in industrial application and jewellery. At least 13 people were injured in a labour fight at a mine of Anglo American Platinum, the world's top platinum producer.

Spot platinum was little changed at US$1,691.74, off a two-week low of US$1,666.50 hit last Friday.

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