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Gold flat on China bank steps

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Gold was little changed on Wednesday with investors seeking the next clue to direction after a broad sell-off in commodities the previous day when China’s surprise monetary tightening drained the appetite for riskier assets.

China tightened monetary conditions on Tuesday as the world’s third-largest economy roars ahead, surprising investors with an increase in banks’ required reserves. The move rocked global financial markets.

Spot gold rose 0.1 percent to $1,128.75 an ounce as of 0254 GMT, compared to New York’s notional close of $1,127.95.

It fell more than 2 percent on Tuesday, marking the biggest one-day percentage loss since December 17.

Technical selling had dragged prices lower after spot bullion fell below its 50-day moving average at $1,130, analysts said.

U.S. gold futures for February delivery were at $1,129.80 an ounce, up 0.04 percent. The contract settled Tuesday down $22 or 1.9 percent at $1,129.40 on the COMEX division of the New York Mercantile Exchange.

Aggressive selling was pausing as gold bullion slid 2.8 percent from a five-week high of $1,161.50 marked on Monday.

But a further downturn is possible, said Tetsu Emori, a fund manager at Tokyo-based asset manager Astmax Co, as new money inflows from fund managers in the past weeks had helped prop up gold prices.

“The news on China’s central bank triggered a wave of selling. But the market still looks a bit overbought after active buying by index funds especially at the start of the year,” he said.

Such buying was not necessarily related to gold’s fundamentals and the market was thus vulnerable to a technical correction.

Emori also said historical data shows that a reversal of a rally between late December to early January often results in a 6-10 percent correction before bottoming out.

Volatility in commodity prices could stay high in the coming days as passively managed index funds were set to rebalance their holdings in line with the new weighting portfolio for 2010 by such commodity indexes like S&P GSCI and Dow Jones UBS.

In the currency market, the euro stayed on the defensive against the dollar, retreating from a four-week high above $1.45 on Monday.

The holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, extended recent declines. But physical buying by newly listed U.S. platinum and palladium ETFs rose in the first two trading sessions.

SPDR Gold Trust said its holdings fell 3.657 tonnes or 0.3 percent to 1,115.884 tonnes on Tuesday, the lowest level since mid-November.

As of Monday, ETFS Physical Platinum Shares had bought 80,000 ounces of platinum, while the ETFS Physical Palladium Shares held 90,000 ounces of palladium, a ETF Securities spokeswoman said.

Spot platinum was at $1,571 an ounce against its notional New York close of $1,568.50. Spot palladium was at $423 against $421.50.

On Tuesday, platinum reached $1,624, its highest since August 2008, while palladium hit an 18-month high of $439.

Source: Reuters

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