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Wed 11 Jan 2012 05:15 PM

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Gold toys with one-month highs as demand blooms

Gold has risen by 1.5% this week, in line with a modest pick-up in the European single currency

Gold toys with one-month highs as demand blooms
China imported nearly a fifth more gold from Hong Kong in November than the previous month

Gold steadied around one-month highs on Wednesday after a
break above a key technical level and evidence of strong demand from major
consuming nations supported the market, although a retracement in the euro
pulled the price below the day's highs.

Gold has risen by 1.5 percent this week, in line with a
modest pick-up in the euro, which is battling against fresh concerns about the
ability of several euro zone nations to fund themselves.

The gold price vaulted above the 200-day moving average
around $1,635 an ounce on Tuesday, which prior to December's sell-off had
marked an important level of support, but since then has acted as stiff
overhead resistance.

The break to a one-month high of $1,646.90 an ounce has
given investors more confidence to buy the metal, especially in light of
improved demand in India, where the rupee's rise against the dollar has cut the
cost of buying bullion for local consumers and in light of a sharp rise in
Chinese imports.

Spot gold was up 0.1 percent at $1,633.29 an ounce by 1220
GMT. US February gold futures were up 0.2 percent at $1,635.30 an ounce, having
earlier risen to a high of $1,648.00, before the euro fell below $1.2700.

"Gold has come well through that (the 200-day moving
average) and I would not be surprised if some of the buying we are seeing is
short-covering. This is a big relief for gold bulls that, in fairly short
order, we've managed to overcome that technical level," Ross Norman,
director at bullion dealer Sharps Pixley, said.

"The other thing I think that is fairly significant is
the Chinese story... the imports from Hong Kong have been phenomenal," he

China imported nearly a fifth more gold from Hong Kong in
November than the previous month, continuing a trend of sharply rising
purchases that has seen bullion flows to the mainland more than treble in the
first 11 months of the year.

A record 102.525 tonnes of gold entered the mainland from
Hong Kong in November, pushing the total gold flow in the first 11 months of
the year to 389.295 tonnes, said the Hong Kong Census and Statistics

The volume of gold traded has risen in the last week,
indicating more investors are active in the market once more.

According to data from CME Group, which offers the benchmark
gold futures contract <0#GC:>, volume on Tuesday topped 160,000 lots,
reaching its highest since early December and about 25 percent above average
turnover on a rolling-one month basis.

"While the dollar may not see a significant correction
soon, and is likely to continue to gain against the euro as the euro zone
crisis persists, the negative effects of a stronger dollar on gold are likely
to be largely diminished in 2012, allowing the bullish macro drivers to dictate
price action once again," Societe Generale said in a research note.

The prospects of aggressive monetary easing from the world's
key central banks, including the European Central Bank, will keep sentiment for
gold and silver bullish, it also said.

Gold usually trades inversely to the dollar, falling as the US
currency rises, when non-US investors find it more profitable to sell the metal
and book a higher profit when exchanging the dollars back into their own

The correlation between gold and the dollar reached its most
negative in 14 months last week, around -70 percent, although this relationship
has eroded in the last few trading days to closer to -50 percent, meaning the
gold price is less likely to suffer if the dollar picks up.

Adding to the support for gold, dealers reported strong
physical demand from India, the world's largest bullion buyer, after the rupee
hit a one-month high against the dollar.

Silver fell 0.6 percent on the day to $29.78 an ounce.

The gold/silver ratio, the number of ounces of silver needed
to buy one ounce of gold, is around 54.78, having risen from 54.22 a week ago,
indicating gold's modest outperformance.

Platinum was set for a third daily gain, up 0.7 percent on
the day at $1,471.50 an ounce.

The metal has been helped this week by reports of a high
risk of power outages in South Africa, the world's largest producer of
platinum, where both planned and unplanned maintenance are expected to disrupt
electricity supply.

Palladium was down 0.2 percent on the day at $631.97 an