Gold falls from record on oil; ETF holdings inch up

Gold pared early gains on Tuesday and slipped below a record high hit in the previous session as oil prices fell, but a rebound in ETF holdings suggested that investors remained jittery about unrest in North Africa and the Middle East.

One of Libyan leader Muammar Gaddafi's sons, Saadi, said his father had not yet thrown his army into full battle against rebels, saving it to shield Libya against foreign attack, and civil war could erupt if he did. But two Arab newspapers and al Jazeera television said Gaddafi was looking for an agreement allowing him to step down.

Spot gold fell USD 2.89 an ounce to USD 1,427.85 an ounce by 0649 GMT, having rallied as high as USD 1,444.40 an ounce on Monday, a record high, as violence flared in Libya and after the downgrade of Greece's credit rating reignited worries about euro zone sovereign debt.

"I can say it's profit taking. It could not breach a high and it dropped down a bit. So many people are long in the market and you have to squeeze the longs before you reach a new high," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.

"But I don't think there will be a big drop because there's so much uncertainty," he added.

The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings edged up to 1,217.295 tonnes by March 7 from 1,210.621 tonnes on March 3, which was a 9-1/2 month low.

US gold futures for April fell USD 6.0 an ounce to USD 1,428.5 an ounce after striking a record at USD 1,445.70 on Monday.

US crude accelerated a drop towards USD 104 a barrel after the Kuwaiti oil minister said OPEC is in talks to increase production. OPEC is in consultations regarding a potential output rise, Kuwait's Oil Minister said on Tuesday, but added that there was no decision for the group to produce over quotas yet.

Dealers saw bargain hunting in other parts of Asia, but there were also worries inflation could prompt countries to raise interest rates, which could eventually curb demand for commodities.

"We've seen light buying from the physical side but there's nothing great so far," said a dealer in Singapore. "There's a small volume of scrap export from Indonesia, and premiums for gold bars remain at USD 1."

Premiums in Hong Kong were steady at USD 1 to USD 1.50 to the spot London prices.

Emerging market economies that powered the global recovery may be growing too fast for their own good as inflation pressures build, a top International Monetary Fund official said on Monday.

China, Brazil and other fast-growing nations have struggled to contain inflation and control heavy inflows of investment funds. Although the IMF has been warning for months of the risks of price pressure, the comments by the Fund's first deputy managing director, John Lipsky, suggested the IMF is growing increasingly concerned.

Silver was steady after rising as high as USD 36.70 an ounce on Monday, a 31-year peak, on the back of rising gold prices and physical demand from China.

"I heard some big importers have bought silver because of talk the price will go up as high as USD 120 an ounce. But I think the main reason why people are buying silver is because the price is much cheaper than gold," said a dealer in Hong Kong.

Holdings in the world's largest silver-backed exchange-traded fund, iShare Silver Trust, rose to 10,898.14 tonnes by March 7, their highest since early January, from 10,794.89 tonnes on March 3.

Platinum and palladium tracked declines in equities.

In other markets, the euro stalled on Tuesday, while Asian stocks remained under pressure as investors fretted that higher energy prices would stunt the global economic recovery.

Market players have been focused on the prospect of a European Central Bank interest rate rise as early as next month, but the euro zone debt crisis returned to the fore on Monday, when Moody's slashed Greece's sovereign rating by three notches.