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Mon 9 Jan 2012 04:56 PM

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Gold price recovers from lows as dollar retreats

Traders stays cautious ahead of meeting between French, German leaders on EU economy

Gold price recovers from lows as dollar retreats
The euro recovered from the 16-month low it hit against the dollar on Monday

Gold prices steadied in Europe on Monday as a retreat in the dollar took some early selling pressure off the metal, with trading cautious ahead of a meeting between the French and German leaders on the euro zone economy later in the day.

Spot gold was little changed at $1,617.29 an ounce at 1110 GMT versus $1,616.98 late in New York on Friday, up from an earlier low of $1,604.44. US gold futures for February delivery were up $1 an ounce at $1,617.90.

While confidence in gold's ability to revisit last year's record high above $1,920 an ounce was shaken by a 10 percent price drop in December, rock-bottom interest rates and concerns over debt levels and growth remain supportive, analysts said.

"It's hard to point to any negative factors for gold," said Saxo Bank senior analyst Ole Hansen. "Speculative length can be increased quite a bit as it is relatively low, and the dollar could be positioned for a bit of weakening - euro short positioning rose to another record last week."

"We have the [Merkel-Sarkozy] meeting today," he added. "Quite often ahead of these meetings, markets tend to be a bit hesitant of getting too carried away [in case] new initiatives are announced. On that basis, we see the potential for a bit more of a pullback on the dollar. That should be supportive [for gold]."

The meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy later will focus on ways to boost growth and finalise details of a deal to increase fiscal coordination in the euro zone.

The euro recovered from the 16-month low it hit against the dollar on Monday to rise 0.2 percent ahead of the talks, but worries over sovereign funding kept investors bearish. A softer dollar tends to benefit gold.

Money managers cut their net length in gold futures and options for a third straight week as the price of bullion fell to its lowest in nearly six months, US Commodity Futures Trading Commission figures showed on Friday.

Net speculative length in gold, which reflects bets on higher prices, is now at its lowest in two years, analysts said.

This decline in net speculative length is likely to mute the impact of index rebalancing this week, which will see last year's outperforming assets sold and underperformers bought. Gold rose more than 10 percent in 2011.

"If the market was very long right now, index selling would make gold considerably more vulnerable to the downside than we expect it to be," UBS said in a note last week.

In the short term, gold's continued recovery from December's five-month low will be reliant on it retaking its 200-day moving average. It fell through this key technical level, currently just above $1,633 an ounce, in mid-December.

On the physical markets, trading volume on benchmark gold contracts on the Shanghai Gold Exchange remained firm on Monday after spiking to a historic high at 12,855 kg last Wednesday.

Indian gold traders continued to stock up, capitalising on a 7 percent fall in prices from the beginning of December.

India and China are by far the biggest consumers of physical gold, responsible for almost half of all global gold fabrication demand last year.

Among other precious metals, silver was up 0.7 percent at $28.88 an ounce, while platinum was up 0.1 percent at $1,399.75 an ounce and palladium was up 0.3 percent at $614.50 an ounce.

Gold retained its historically unusual premium over platinum into a sixth month in January, after hitting parity with the white metal for the first time in 2-1/2 years in August.

The gold:platinum ratio - the number of platinum ounces needed to buy an ounce of gold - reached its highest in more than 25 years on Monday, at 1.16.

"Downside risks to the global growth outlook, at least over the next few months, should mean that platinum group metals prices will under-perform," said Deutsche Bank in a note.

"Indeed, we expect platinum to trade at a discount to gold throughout this year."