"We are into a typical end-of-year scenario now, where order flow more than fundamentals drives the market," said Saxo Bank senior manager Ole Hansen. The U.S. Commodity Futures Trading Commission on Thursday released a long-awaited proposal to set position limits in commodity markets.
"Yesterday's story about CFTC limits was enough to make a few investors call it a day and some position squaring was seen," Hansen said. "Today we are jumping on the weaker dollar and retracing back up again. "It will be choppy for the rest of the year but unless we see any dramatic news, investors are happy with their positions based on expectations for further price increases into 2011."
U.S. gold futures for February delivery rose $2.00 an ounce to $1,373.00.
Better-than-expected data on German business morale from the Ifo think tank helped the euro rise 0.8 percent versus the dollar, weakness in which increases gold's appeal as an alternative asset and makes assets priced in the U.S. unit cheaper for holders of other currencies.
But the single currency remains vulnerable after the Moody's cut and as an agreement by European Union leaders on Thursday to set up a permanent crisis management mechanism failed to calm fears about the region's debt crisis.
EU leaders agreed at the summit to make minor changes to the group's governing treaty to establish a permanent mechanism from mid-2013 to resolve sovereign debt problems.
"The EU summit of Heads of State and Government has not produced any surprises," said Commerzbank in a note. "Merely the key points of a permanent crisis mechanism, drafted by finance ministers ahead of the meeting, have been confirmed." "Uncertainty among market players is likely to continue."
POTENTIAL OPENED
Thursday's move below $1,372.30 an ounce opens up the potential for a fall toward $1,351.50 an ounce, Swiss bank UBS said in a note.
A break of that level could mean a further move down to $1,330, while a move through $1,408 would be needed to signal an end to the correction, it added. Investor demand for gold-backed exchange-traded funds remained light, with holdings of the world's largest, New York's SPDR Gold Trust, falling to a two-month low of 1,283.757 tones on Thursday.
Gold buying in the world's biggest bullion consumer, India, was also subdued as banks closed for a public holiday, and dealers said trading was expected to remain thin as the wedding season came to an end.
Elsewhere a report said China's Guotai Asset Management plans to launch the country's first mutual fund to invest in overseas commodity ETFs. Among other precious metals, silver was at $28.78 an ounce against $28.87, platinum at $1,691.99 an ounce versus $1,694.49 and palladium at $733.22 versus $736.50.
"Near-term price action in the platinum group metals is being more determined by the search for hard assets and the rallies in gold and silver, than by immediate industrial demand," said HSBC in a note. Other commodities also rose, with oil climbing toward $88 a barrel as cold weather boosted distillates demand and the dollar weakened, and base metals firming.
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