Gold steadied on Tuesday, recovering early losses linked to euro weakness, as renewed focus on the slow pace of U.S. growth altered the metal's relationship to assets seen as higher risk, boosting confidence in its longer-term prospects.
Gold posted its biggest one-day rise in more than three years on Friday after weak U.S. jobs data fuelled speculation the Federal Reserve would unveil a new round of monetary easing, and has held on to most of its gains despite a weaker euro.
It has traded in line with the single currency and assets seen as higher risk, like stocks and other commodities, for much of this year, but a shift in focus from Europe's debt crisis to the slow pace of U.S. growth has changed that relationship.
On Friday the (jobs) report stimulated anticipation of more monetary easing going ahead, Bayram Dincer, an analyst at LGT Capital Management, said.
There was a lot of bad news from macro figures and from the political side that accumulated during May, but gold didn't react as it should from a safe-haven asset perspective, he added. We are now seeing this correlation to risk sentiment and risky assets weakening a little, and even breaking.
Right now real yields on 10-year TIPS in the U.S. are minus 50 or 60 basis points, so there is also this component of a low real opportunity cost in place.
Spot gold was little changed at $1,618.85 an ounce at 6:28 a.m. EDT (1028 GMT), off a low of $1,612.19 an ounce, while U.S. gold futures for August delivery were up $6.20 at $1,620.10.
It steadied despite a retreat in the euro, which fell 0.5 percent against the dollar to below $1.25, as concerns grew over Spain's ability to restore its banks to health as a minister said high borrowing costs meant Spain was effectively shut out of the bond market.
Finance chiefs of the Group of Seven leading industrialized powers will hold emergency talks on the euro zone debt crisis at 1100 GMT on Tuesday, G7 sources said.
German debt prices rose and Spanish bond yields briefly jumped after Spain's treasury minister said the country was shut out of the market, but investors were reluctant to take new positions before the G7 conference call.
CHINESE BUYING SUPPORTS
Confidence in gold, which has been knocked by weak consumption in number one gold buyer India in recent months, was further supported by data on Monday that showed extremely elevated imports of the metal into China.
Gold prices may be supported by China's growing appetite for bullion, as imports from Hong Kong climbed to record highs, HSBC said in a note. Furthermore, imports of gold coins, which are reported in a separate category in the trade data, increased significantly to 1,876 kg in April from 5 kg in March.
The ability of China to sustain gold imports is impressive, considering that the economy is showing signs that growth is cooling and income growth is moderating, it said.
From a chart perspective gold is in healthier territory after its rise back above $1,600 an ounce. Commerzbank said in a note that it expects the metal to rise further following a pause, having regained its safe haven status.
Gold has now successfully bounced off the major 1532.20/1522.48 support zone, it said. A minor retracement back to the 1600 level is now on the cards but the next lower significant 1532.20/1522.48 support area should not be retested any time soon, though.
We expect the precious metal to stay above its late May high at 1584.20 on a daily closing basis in the course of this week and for it to head higher still in the near future.
Holdings of gold exchange-traded funds, which issue securities backed by physical stocks of the precious metal, rose further on Monday, Reuters data showed.
Holdings of silver funds declined, meanwhile, with the largest silver backed ETF, New York's iShares Silver Trust, recording an outflow of just over four tonnes on Monday.
Silver edged up 0.2 percent at $28.27 an ounce. The gold/silver ratio, or the number of silver ounces needed to buy an ounce of gold, earlier hit its highest this year at 57.3 as gold, unusually, outperformed silver in a rising market.
Silver, as a smaller and less liquid market than gold, is usually the faster riser when both markets are climbing. Silver investors are still smarting, however, from two very large retracements in silver prices last year which burned many.
Among other precious metals, spot platinum was up 1 percent at $1,435.75 an ounce, while spot palladium was up 0.1 percent at $608.78 an ounce.