May 14, 2012, 09.14 AM IST
Gold edged up on Monday as bargain hunters lifted prices from four-month lows, but gains could be capped by fears about a worsening debt crisis in Europe, after an inconclusive Greek election raised the risk the country could exit the euro zone and the European Union.
Gold was behaving more like risk assets this year as the turmoil in Europe sent the euro to m ulti-month l ows and investors turned to the safety of the dollar, said analysts.
The US dollar has also been supported by optimism that more positive labour market numbers will be seen soon.
Gold added USD 3.39 an ounce to USD 1,581.69 by 0248 GMT, having hit a low around USD 1,573 o n Friday, its weakest since early January, on fears that the debt crisis in Europe will hurt global economic growth.
"I think for as long as the crisis in Europe drags on, it's going to keep sentiment broadly in check. At the moment, gold has been painted with the risk brush. It's going to be very much a tracker of the equity markets," said Nick Trevethan, a senior commodity strategist at ANZ in Singapore.
"The range should be from just below USD 1,580, up towards USD 1,600. The market really needs to get back towards USD 1,600 or above in order the confirm we have bottomed."
US gold for June slipped USD 1.90 an ounce to USD 1,582.10.
Money managers in gold futures and options cut their net long positions by 20% to the lowest level since December 2008, as investors aggressively unwound their bullish bets in the precious metal after a sharp price pullback.
Greece's president will continue talks with the country's political leaders on Monday to try to form a government after an inconclusive election left parliament divided between supporters and opponents of the 130 billion euro EU/IMF bailout.
Investors had turned to gold as a safe haven during the debt crisis last year, sending prices to an all time high of around USD 1,920 an ounce. But this year, gold is trading more in line as a commodity that moves in the opposite direction to the US dollar.
The euro broke an option barrier at USD 1.2900 and dipped to as low as USD 1.2881 at one point on trading platform EBS, its lowest level since January 23 after Greek political leaders failed in their latest efforts to form a ruling coalition.
The Nikkei rebounded to above 9,000 after China's decision to slash bank reserve ratios on Saturday, countered the unease surrounding the euro zone. Shares outside Japan slipped.
In the physical market, jewellery makers and speculators took advantage of last week's drop in prices.
"We've seen physical buying interest. But people are still bearish about the market because of the strong dollar and worries that Greece won't be able to solve its problems," said a dealer in Hong Kong.
"Investors are not so aggressive, and I think the jeweller sector is more important. Supply is a bit tight in the physical market."
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