NEWS / Monetary Policy

Gold rebounds from heavy fall after dollar weakness

By Atul Prakash

LONDON - Gold bounced back in European trade on Wednesday after slipping to a three-month low in Asia as dollar weakness attracted bargain-hunters, dealers said.

But gold's sharp fall of 26 percent from its 26-year peak of $730 an ounce hit a month ago had made market players cautious and bullion dealers remained on edge.

"We see some signs of consumers coming in under the market, but nothing sizeable enough to hold back the market in the face of further speculative selling," said a metals dealer in London.

"We will see a continuation of a downward trend overall, but may be not so much as the pace yesterday," the trader said.

Spot gold briefly fell to a three-month low of $543 an ounce before rising to $571.10. Prices were indicated at $569.50/570.50 by 1436 GMT, up from $562.00/562.70 late in New York on Tuesday, when the price fell by more than seven percent.

Tuesday's drop was one of the largest intra-day falls.

The euro was indicated at $1.2630 by 1349 GMT, against $1.2543 in New York late on Tuesday.

A weaker dollar makes gold cheaper for holders of other currencies and prompts some investors to shift to safe-haven assets from other markets for better returns.

"Overnight stabilisation in other asset markets has clearly helped sentiment towards precious metals," said John Reade, precious metals analyst at UBS Investment Bank.

"But after recent losses in risk markets we suspect it is too soon to call an end to the sell-off in gold as there are potentially lots of external factors that could rattle investor sentiment," he said.

SHAKY GROUND

Analysts said precious metals remained vulnerable to further selling by investors trying to shift out of commodities.

UBS saw gold at $550 in one month and $580 in three months, down from its earlier estimate of $630 and $650 respectively. It lowered its forecast for silver to $9.00 and $10 for one month and three months from $12.00 and $12.50.

"Previously when we saw a major correction, gold always came back strongly, but investors will be more careful this time about taking positions in gold again," Shuji Sugata, assistant manager at Mitsubishi Corporation Futures and Securities, said.

"It may take a while before the market can fully regain confidence."

In other markets, copper rebounded on bargain hunting, recovering from Wednesday's early sell-off.

Silver fell as low as $9.38 an ounce, down 38 percent from last month's 25-year high of $15.17. It was last quoted at $9.86/9.96, versus $9.56/9.66 late in New York.

Platinum was at $1,133/1,140 an ounce after falling to $1,090, compared with $1,116/1,120 in New York. Palladium was at $282/289 an ounce from $272/277.