Gold moved sideways in European session as investors awaited the ISM non-manufacturing index which will likely show that U.S.' manufacturing sector has fallen into contractionary phase in August.

Recent price action suggests that gold has been torn between improving risk appetite and higher possibility of Fed's easing which will devalue the USD. In our opinion, the yellow metal will gain support on dips and rise further to new highs as long as global economic uncertainty persists and major central banks keep interest rates low.

The official sector remained an active buyer of gold despite elevated price. The latest IMF report shows that Russia bought 4.4 tons of gold in July, increasing reserve of the world's 8th largest gold holder to 841 tons. Colombia also raised its holding by 4.4 tons to 9.1 tons. Separately, the US Mint showed that sales of American Eagle gold coins rose to 112K oz in August, the biggest amount after January in terms of ounce. The loss of triple A rating in US debts and lingering debt problems have triggered investors to turn to safe-haven assets.

Gold sales have been subdued. According to ECB's weekly financial statement, gold and gold receivables dropped 4M euro in the week ended August 26, reflecting the sale of gold by 1 Eurosystem central bank and gold coin trading by another Eurosystem central bank. With only 1 month to the end of the second year of CBGA 3, total gold sales by European central banks have been at around 53 tons, far below the yearly limit of 400 tons. The fact that most of the sales was made under IMF's sales program indicated European central banks are interested in keeping more of the yellow metal.

As we are waiting for the US ISM, various countries have released their manufacturing data. China's PMI climbed +0.2 points higher to 50.9 in August. Domestic demand stayed form but exports weakened as affected by the headwind faced in advanced economies. The risk of inflation remains as input prices unexpectedly rebounded during the month. Premier Wen Jiabao reiterated yesterday that stabilizing overall price levels remains the top priority task of the government.

Eurozone's PMI was revised lower to 49 in August from preliminary reading of 49.7 while UK's reading surprisingly fell to 49 from 49.1. In Switzerland, the SVME PMI slipped to 51.7 in august from 53.5 in July. The market had anticipated a bigger drop to 51.2. US' ISM manufacturing index might have slipped to 48.5 (contractionary territory) in August from 50.9 in July.