Gold up slightly but limited by dollar, European equities

London (Aug 5)   Gold edged up on Tuesday following disappointing Chinese economic data, but a firmer dollar and stronger European equity markets limited gains.

Spot gold rose 0.2% to $1,290.63 an ounce by 10.31am GMT. The metal had fallen to its lowest in five weeks at $1,280.40 on Thursday before staging a mild recovery.

US gold futures for December were up $2.90 at $1,291.80/oz.

"After the sell-off we saw on Thursday and the reasonable recovery on Friday, $1,280 is quite an important level, and if we start to take out that there is a risk of backing down to the June lows in the $1,240 area," Saxo Bank senior manager Ole Hansen said.

Growth in China’s service sector slowed sharply in July to its lowest level in nearly nine years, a private sector survey showed. The report hurt Asian stocks and boosted gold, which is seen as an alternative to equities.

"On the upside, $1,305 is the next level to watch, but in terms of economic data we don’t have much this week apart from the ECB (European Central Bank) on Thursday, which is expected to deliver a dovish message," Mr Hansen said.

"And that could in turn have a negative impact on the euro, add some additional support to the dollar, which is not good for the gold price."

The dollar rose 0.2% against a basket of currencies, mostly aided by a lower euro after weaker than expected data on Italy’s service sector.

The US currency remained below a 10-and-a-half-month peak, however, due to lower US Treasury yields, whose returns are closely watched by the gold market, given that the metal pays no interest.

"I would keep an eye on bonds because obviously one of the reasons why people tend to be negative on gold is the fact that we are approaching a normalisation of US interest rates and speculation about when tightening will commence, but bond yields are still close to the lowest level of the year," Mr Hansen said.

The metal’s gains were also kept in check by stronger European equities, which bucked the downtrend in Asian markets.

Markets were waiting for data on US factory orders and the ISM non-manufacturing purchasing managers index on Tuesday for further clues about the world’s largest economy.

Data last week was mixed, with second-quarter gross domestic product rebounding sharply but jobs growth in July slowing down.

In a measure of investor sentiment, SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell 1.79-metric-tonnes to 800.05-tonnes on Monday, the first drop since July 24.

Israel and the Islamist Hamas movement agreed on Monday to an Egyptian-proposed ceasefire to end four weeks of fighting in the Gaza Strip, reducing demand for gold as a haven from risk.

The physical markets have also failed to provide strong support as buying interest has been sluggish globally.

Perth Mint’s sales of gold and silver dropped to a three-month low in July as increasing optimism about the global economy curbed appetite for bullion, according to the most recent data on its website.

Among other precious metals, spot silver was unchanged on the day at $20.16/oz.

Platinum gained 0.1% to $1,454.20/oz, while palladium fell 0.7% to $844.25/oz.