SINGAPORE: Gold regained strength on bargain hunting on Thursday but declines in equities blamed on the euro zone crisis could prompt investors to sell bullion to cover losses, while another rally in the US dollar could also put pressure on prices.
Japanese stocks hit a two-and-a-half-year low and the euro struggled after a disappointing German bond sale raised alarm that Europe's ever-worsening sovereign debt crisis is starting to affect even the continent's economic powerhouse.
Spot gold added 0.25 percent to $1,697.03 an ounce by 0800 GMT, having slipped on Wednesday on falling equities, weak Chinese factory data and a contracting euro zone economy.
Prices have eased more than 10 percent since hitting a record of around $1,920 in September.
"In the near term, gold needs to sustain or close above $1,726 an ounce for the reversal of the bullish tint," said Pradeep Unni, senior analyst at Richcomm Global Services.
"The recent weakness of the gold price has been largely due to the option expiry of gold contacts and also the return of a degree of confidence in the US dollar, but that isn't going to sustain for long after the failed US debt deal."
US gold December futures added $1.9 to $1,697.80 an ounce. Thursday is the US Thanksgiving holiday.
Debt problems plaguing Europe and the United States have pressured markets, knocking the S&P 500 down more than 7 percent over the last six sessions. World stocks hit their lowest in six weeks on Wednesday.
The euro held near seven-week lows against the dollar after poor demand for German government bonds indicated that investors viewed investing in the euro zone as being too risky.
"The safe haven bid for gold could come back. For the short-term however, gold prices are still tracking broad movements in equity and commodity markets," said Ong Yi Ling, an analyst at Phillip Futures in Singapore.
"It is not immune to losses in external markets. In the 2008 financial crisis, gold dropped about 34 percent from its peak before prices bottomed. I am looking for support at the $1,600 level, and I think resistance is at about $1,780 to $1,800."
The physical sector saw some bargain hunting but overall trading was muted at jewellers waited for prices to decline further.
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