Gold prices rose on Wednesday after European Central Bank policymaker Ewald Nowotny said he could see grounds for giving Europe's rescue fund a banking license, lifting the euro off lows versus the dollar and pushing stock markets higher.
Giving Europe's ESM bailout fund a banking license would allow it to tap cheap ECB funding. Investors have increasingly worried that the fund's firepower would be hugely diminished if Spain needed a full scale sovereign bailout.
The precious metal is particularly sensitive to moves in the wider financial markets in the absence of direction from physical demand, which has been weak in recent months, tending to benefit from dollar weakness and sharper appetite for risk.
Spot gold was up 0.6 percent at $1,589.71 an ounce at 6:02 a.m. EDT (1002 GMT), while U.S. gold futures for August delivery were up $12.90 an ounce at $1,589.10.
Gold has held in a $75 range so far in July, its narrowest monthly spread in since April. Weak seasonal buying in some Asian markets, waning inflows into gold-backed exchange-traded funds and caution amongst investors have limited price gains.
Four to six weeks will take us into an interesting time for the gold market, which we think should be more constructive, Credit Suisse analyst Tom Kendall said.
Between now and then, physical demand is still pretty soft, positioning is disinterested across much of the investment community, he added. Technically the price action is starting to look a bit more constructive... but that could fade as quickly as it appears to have been building.
We've had a modest uptick in sentiment this morning with these comments about the banking license for the ESM, but again that kind of market reaction to political commentary can be very easily undone by economic data, which has not been encouraging.
Economic data from Europe was weak on Wednesday. Germany's closely watched Ifo index of sentiment came in below forecasts, while Britain's second-quarter growth numbers were far worse than expected. U.S. new home sales data will be closely watched later in the day.
PHYSICAL DEMAND SOFT
Physical gold traders in number one consumer India stayed on the sidelines after prices extended gains for a third straight day to hit their highest level in more than two weeks.
The most-active gold for August delivery on the Multi Commodity Exchange (MCX) rose to as much as 29,729 rupees per 10 grams, the highest level since July 6.
Among other precious metals, silver was up 0.4 percent at $27.06 an ounce, tracking gains in gold. Confidence in the metal remains shaky however, analysts said, with investors wary of taking positions in the volatile metal.
The world's largest silver-backed exchange-traded fund, the iShares Silver Trust reported an outflow of 69.36 metric tonnes (76.45 tons) on Tuesday, the biggest one-day drop in its holdings in three weeks.
ETFs, which issue securities backed by physical stocks of metal, have proved a popular way to invest in gold and silver in recent years.
Silver is finding little support from the investor side at present, Commerzbank said in a note. The iShares Silver Trust, the world's largest silver ETF, yesterday recorded outflows of nearly 70 tons. Money managers are also showing reticence at the moment, net long positions at the very low level of 4.5 thousand contracts.
Elsewhere, gold's rise pushed its premium over platinum, which has suffered from the impact of slowing economic growth on demand, above $200 an ounce for the first time since early January. The platinum/gold ratio rose to a 7-1/2-month high at 1.15/1.
Spot platinum was up 0.9 percent at $1,390.89 an ounce, while spot palladium was up 1.4 percent at $564.03 an ounce.
Johnson Matthey (JMAT.L), the world's largest supplier of catalytic converters, posted a virtually flat first quarter, as the impact of lower platinum and palladium prices offset the benefit of increased car and truck sales in North America.