Gold's upward momentum cools as Cyprus fear ebbs

Gold traded little changed on Thursday, losing steam as panic over Cyprus's bailout eased, though the US Federal Reserve's pledge to stick with its loose monetary policy and lingering concerns over the euro zone kept the metal supported.

Cyprus is buying time by extending a bank lockdown to next week, scrambling to avert a financial meltdown after rejecting the terms of a bailout from the European Union and turning to Russia for a lifeline.

The initial shock in the financial markets has faded, as the small size of Cyprus's economy is expected to have a minimal impact on a global scale, and its support for gold may not last long, analysts said.

"Cyprus is not a big story in terms of the size of its economy and the financial involvement," said Dominic Schnider, analyst at UBS Wealth Management in Singapore.

"The question (on gold) at the end of the day is if we have high inflation. If your view is that inflation will gear up faster than interest rates, then the story is still good and gold should recover to $1,800 an ounce 12 months from now," Schnider said.

But he cautioned that gold faces headwinds from a strong dollar, which has risen nearly 4 percent so far this year against a basket of currencies. By comparison, gold has fallen 4 percent.

The Fed said it will press forward with its aggressive policy stimulus despite improvement in the US economy and unfazed by concerns that the large-scale quantitative easing would inflate asset bubbles and disrupt financial markets.

The Fed's quantitative easing has helped gold stage a record-breaking rally in recent years, but signs of economic recovery have triggered worries that the central bank would exit the stimulus sooner than expected, weighing on sentiment in gold.

Spot gold edged up $1.27 to $1,607.16 an ounce by 0326 GMT, but off a three-week high of $1,615.16 hit earlier this week due to safe-haven buying.

US gold inched down $1 to $1,606.50.

Technical analysis suggested spot gold still targets $1,626 an ounce, as indicated by its wave pattern and a Fibonacci projection analysis, said Reuters market analyst Wang Tao.

Holdings of SPDR Gold Trust, the world's biggest gold-backed exchange-traded fund, stood unchanged from a day earlier at 1,222.162 tonnes, after posting the first daily inflow since early February.

In other news, the right-wing Swiss People's Party (SVP) has gathered enough signatures to force a referendum on a proposal to ban the country's central bank from selling any of its gold reserves.

Precious metals with industrial application firmed a touch, tracking the strength in base metals, after data showed a pickup in the growth of China's vast manufacturing sector.

Spot silver gained 0.3 percent to $28.84. Spot platinum rose 0.4 percent to $1,580, and spot palladium was up nearly half a percent at $760.47.