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gold-bars-454LONDON: Gold expand back towards the previous session's record high near $1,500 an ounce on Tuesday, with appetite for risk fragile after Standard & Poor's cut its U.S. outlook and as euro zone sovereign debt concerns simmered.

Prices rose to a record $1,497.20 an ounce on Monday after the S&P announcement rocked the markets but slipped back quickly after running into strong resistance at higher levels.

Spot gold was bid at $1,494.05 an ounce against $1,495.08 late in New York on Monday.

U.S. gold futures for June delivery rose $2.20 an ounce to $1,495.10.

"Most of the trends out there whether that's worries about the euro, worries about coming inflation, worries about U.S. debt, Chinese buying seeming relatively strong suggest the price ought to be going higher," said David Jollie, an analyst at Mitsui Precious Metals.

"It seems there is a reasonable appetite still to buy, but if you look at the pace, it has gone up at in the last week. That doesn't seem sustainable," he added.

"It would be a surprise if we don't get to $1,500 an ounce, but it would also be a surprise if we shot through it."

The euro steadied against the dollar on Tuesday after the previous day's sell-off, but debt problems in the euro zone kept investors wary of the single currency.

The CBOE Volatility Index, Wall Street's favourite barometer of investor anxiety known as the VIX, jumped as much as 24.5 percent on Monday after S&P warned about the towering U.S. budget deficit.

Risky assets were hit by a double-whammy on Monday after fears mounted that Greece will have to restructure its debt, maybe as early as this summer, and S&P threatened to cut the United States' AAA credit rating.

FISCAL CHALLENGES

"The agency's comment that 'there is at least a one in three likelihood that it could lower its long-term rating on the US within two years' was interpreted by the gold community as reflecting the seriousness of U.S. fiscal challenges and hence provided a catalyst for higher prices," said UBS in a note.

"That the fiscal spotlight is now on the U.S. is gold-positive," it added.

Oil prices continued to correct, however, with U.S. crude futures falling by $1 a barrel in early European trade. Strength in crude after unrest across the Middle East and North Africa earlier this year was a key factor driving gains in gold.

Rising crude prices tend to lift gold, which is often seen as a hedge against oil-led inflation.

Sign the inflation is becoming a major issue in emerging markets, particularly China, has been identified as another support to the precious metal.

Silver also held near the previous session's 31-year high of $43.51 an ounce, last bid at $43.21 an ounce against $43.32 on Monday.

Silver has outperformed gold this year, up 40 percent so far against gold's 5 percent rise. The gold and silver ratio slipped to a 28-year low below 35 on Monday.

Among other precious metals, platinum was at $1,780.35 an ounce against $1,772.65, while palladium was at $739 against $739.93.

                                         

Copyright Reuters, 2011

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