Gold steadies, Italy's debt worries linger

SINGAPORE: Gold steadied on Wednesday on fears the euro zone debt crisis could engulf Italy even after Prime Minister Silvio Berlusconi said he would resign, paving the way for a new leader to act more aggressively to tackle the country's debt problems.

Berlusconi said he would leave office after parliament approved a budget law that included reforms demanded by Europe as a failure by Italy, the euro zone's third largest economy, to fix its debt problems, would have a far bigger impact on the region than difficulties in Greece.

Gold added 0.15 percent to $1,787.50 an ounce by 0639 GMT, but was off Tuesday's high of $1,802.60, its strongest since late September, as investors were cautious over the success of Europe's efforts to tamp down its debt crisis.

"There's a little bit of buying from investors," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong. "There's not much sale of scrap, I must say. I think people still need some gold in hand."

Gold, which hit a record around $1,920 in September on the euro zone debt crisis, could challenge recent highs after European Union finance ministers failed to make progress on ways to shore up sagging banks and avert a credit squeeze.

Italy's Berlusconi became the biggest political casualty of Europe's debt crisis on Tuesday when he announced he would step down after being stripped of his majority in parliament.

"Are we still going to see the political willpower to resolve Italy's challenges? I think that is necessary before we can see a sustainable risk rally," said Ong Yi Ling, an analyst at Phillip Futures in Singapore.

"For now, I don't think we are entirely out of the woods yet. I am looking for gold supported above the $1,750 level. Resistance is at $1,800. Yes, I think longer-term we remain bullish on gold."

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust , gained 0.67 percent from Monday to Tuesday, while those of the largest silver-backed ETF, New York's iShares Silver Trust , dipped 0.12 percent for the same period.

"Europe is approaching the end game -- credit markets and other governments know what its leaders won't admit -- the euro is failing," said Peter Morici, an economist at the University of Maryland business school.

"And then gold, more than the dollar, is set to rocket in value as the crisis unfolds. A massive bailout from Germany with contributions from France and smaller northern states will ultimately be needed, or Italy would follow Greece into default."

US gold fell 0.54 percent to $1,789.50 an ounce.

Shares in Asia rallied and the euro held steady after Italy's prime minister said he would resign, but the financial market also turned its attention to the latest reading on the Chinese economy.

China's annual rate of inflation eased to 5.5 percent in October, the third straight month of decline from a three-year high of 6.5 percent hit in July and in line with analyst expectations.

But rising gold consumption in China, the world's second-largest consumer after India, showed inflation remains a concern.

China's gold consumption is expected to jump nearly 50 percent to reach 400 tonnes this year, the China Securities Journal reported on Wednesday, citing China Gold Association President Sun Zhaoxue.

In the energy market, Brent crude gained for a fifth day on Wednesday, to stand above $115 a barrel, as positive Chinese inflation data soothed fears of a sharp slowdown in the world's second largest oil consumer.

Copyright Reuters, 2011