LONDON: Gold rallied on Friday in line with a jump in the euro, but remained on track for a 1.5 percent decline this week as investors remained doubtful over the outcome of a key European Union summit aimed at resolving the two-year-old debt crisis.
EU leaders agreed stricter budget rules for the euro zone on Friday, but failed to secure changes to the EU treaty among all 27 member states, meaning a deal will instead have to involve just euro zone states and any others that want to join.
The euro jumped on Friday on speculation that a new Chinese investment vehicle could provide much-needed funding to heavily indebted euro zone countries, helping tackle the region’s debt crisis. The ensuing weakness in the dollar supported the gold price, which moves inversely to the U.S. currency.
European Commission President Jose Manuel Barroso is scheduled to speak later in the day and gold will likely remain fairly steady until then, VTB Capital analyst Andrey Kryuchenkov said.
Spot gold was last up 0.5 percent on the day at $1,715.34 an ounce by 1310 GMT, on course for a fall of 1.5 percent on the week, its third week of losses in the past four.
"I wouldn’t get carried away. (The EU leaders) need to convince the market that the crisis can be contained. Gold is trading completely against the dollar, moving in the opposite direction … and the physical side of the market is very quietly waiting on the sidelines for a pullback to start buying," Kryuchenkov said.
"Gold could have a knee-jerk reaction, especially if there is disappointment with the meeting today," he said, adding that $1,680.00 was a key level of support and one at which consumers would likely look to buy.
A failure to hold that level could quickly lead to a sell-off back to $1,600.00, he said.
The overnight price drop to near $1,700 failed to inspire much physical buying interest, as most market participants are cautiously watching the euro zone events play out in a market that lacks clear direction.
"(Gold’s) latest relative weakness can be expected to prompt investors – who recently took a positive view of gold – to continue shedding their positions," wrote Commerzbank analysts in a note.
"A possible price slide below $1,700 may thus accelerate a further slump. Despite these short-term tendencies, we do not believe gold’s long-term upwards trend to be under threat," they said.
Outside the euro zone, China’s industrial output growth hit its slowest pace in more than two years in November and inflation tumbled as economic conditions deteriorated, fuelling hopes for more monetary easing.
Uncertainty around the euro zone’s fate and its impact on the global economy remain the overarching concern in the market.
Spot silver was up 0.8 percent at $31.92 an ounce, 65, but still set for a weekly decline of about 2.0 percent.
On Saturday, China is due to release the preliminary November trade data, which is expected to show a pickup in commodities imports. However, the global economic uncertainty and slower domestic growth could dampen demand in the months ahead.
Spot palladium lost 0.5 percent to trade at $667.75 but was headed for a 2.9 percent rise on the week, its second week of gains in a row. Platinum rose 0.2 percent to $1,493.25 an ounce. –Additional reporting by Rujun Shen in Singapore