Gold up on Europe debt resolution, China economy weighs

LONDON/SINGAPORE (REUTERS) -

Spot gold rallied 1% to $1,657.6 an ounce on Monday, as European leaders moved toward a solid plan to resolve the bloc's debt crisis and signs that China's economy is in better shape than feared.

Author: By Susan Thomas and Rujun Shen (Reuters)

Posted: Monday , 24 Oct 2011

Gold rose 1 percent on Monday, as European leaders edged toward a solid plan to resolve the euro zone debt crisis and signs that China's economy is in better shape than feared.

In recent weeks gold prices have followed moves in riskier assets, with the precious metal's safe-haven appeal diminishing after wild price swings in the past quarter.

The euro hit a six-week high against the dollar on signs of progress on EU policymakers' plans to recapitalize euro zone banks and leverage the region's bailout fund, although there was still uncertainty as a deal has still to be concluded.

"Gold popped up this morning along with most of the commodities markets. The beginning of the EU debt resolution has had a strengthening effect upon commodities and equities as a whole," Credit Suisse analyst Tom Kendall said.

Spot gold rallied 1 percent to $1,657.6 an ounce and eased to $1,647.39 by 0856 GMT (4:56 a.m. EDT), after falling last week.

U.S. gold rose as much as 1.4 percent to $1,658.6 before easing to $1,649.

But technical analysis suggested spot gold could fall to $1,602.74 during the day, said Reuters market analyst Wang Tao.

China's vast manufacturing sector picked up moderately in October, snapping a three-month contraction and underscoring the resilience of the world's second-largest economy backed by robust domestic demand.

"The China PMI got the market fired up, with a lot of shorts covering as the data suggested that the slowdown in China may have peaked," said David Thurtell, a Citigroup analyst.

In the euro zone, the private sector tipped further into decline in October, according to business surveys on Monday that showed the bloc's economy is in serious danger of lurching from stagnation into outright recession.

Spot palladium led the rise in precious metals, rising more than 3 percent to $630.75, after suffering a decline of 1.5 percent last week. It was last at $619.72.

The metal, used mainly in making autocatalysts for gasoline-powered engines, was still the worst-performing precious metal so far this year, down 21 percent.

GOLD INVESTMENT INTEREST LAGS

Investors' interest in gold remained lackluster. Net long positions in U.S. gold futures and options hovered near their 8-month low, and total open interest dipped to a three-month low in the week ended on October 18, data from the U.S. futures regulator showed.

Holdings in the SPDR Gold Trust stood unchanged at 1,227.511 tonnes throughout last week.

The world's largest gold-backed exchange-traded fund saw a small outflow of about 4 tonnes so far this month, and the holdings were down about 53 tonnes from the end of 2010, according to the fund's website. (www.exchangetradedgold.com)

"Gold investor interest has stabilized and physical demand continues to emerge, albeit at softer levels," Barclays Capital said in a note.

"We continue to expect gold prices to be cushioned amid the seasonally strong period for demand, and this remains key before investment demand returns to the driver's seat."

(Additional reporting by Simon Price; editing by Keiron Henderson)