NEW YORK: Gold rose for a third day on Tuesday, driven by a weaker dollar and uncertainty over the outcome of a confidence vote in Greece that may determine whether the country can avert a default on its sovereign debt.
Bullion also got a lift from a return of investor risk appetite, as the grains, commodity and equity markets rose across the board on hopes that the Greek government could avoid defaulting on its sovereign debt.
On the options front, gold volatility has dropped by nearly one-fifth from its peak in mid-May, as prices of the underlying gold futures have largely been range bound after rallying to a record $1,575.79 on May 2.
"Gold has been split between taking its cue from the changes in sovereign risk, but today the sovereign risk has declined and the euro ... has rallied and gold is choosing to track the euro more than it is the reduction in sovereign risk," said James Steel, chief commodities analyst at HSBC.
Spot gold was up 0.4 percent at $1,546.60 an ounce by 2:23 p.m. EDT (1823 GMT).
US August gold futures settled up $4.40 at $1,546.40 an ounce, after trading between $1,539.30 and $1,549. Volume was below 90,000 lots, Reuters preliminary data shows, set for one of the lowest daily volume of the year and about 60 percent below its 30-day average.
Silver touched $36.54 an ounce, its highest since June 10, and was last up 1.4 percent at $36.51.
The CBOE gold volatility index, a bullion market fear gauge, fell nearly 4 percent to below 17, near its lowest level in two months, as the price of the underlying gold futures moved in a narrow range between $1,510 and $1,550 in the last 30 days. (Graphic: http://r.reuters.com/jak32s )
Jonathan Jossen, an independent COMEX gold floor option trader, said a major dealer sold a sizable position in straddles. A straddle is an options plan in which an investor aims to profit on volatility through a call and a put with the same strike price and expiry date. Sale of a straddle position indicates that less volatility is expected.
"If you think there is volatility, you don't really do that. I am not seeing anybody put on a play for a move," Jossen said.
Bullion investors will closely monitor a confidence vote on the Greek government late on Tuesday, the first of three tests the government must survive to avert the euro zone's first sovereign debt default.
Also supporting gold was a report by the International Monetary Fund that Spain faces considerable risks to its recovery and must deepen and conclude reform work to allay market concerns.
GOLD RALLIES IN EURO, STERLING
Gold in euros, which is less than 1.5 percent below a record 1,088.11 euros an ounce, was trading down 0.2 percent on the day, reflecting the pick-up in the single European currency against the dollar.
"Gold is inextricably linked to the events in Greece, both gold and silver are hostage to contagion fears," said RBS analyst Nick Moore.
Gold priced in sterling will breach resistance at 950 to 955 pounds, said independent investor Dennis Gartman. Sterling-priced gold hit a record 954.63 pounds on Monday.
Financial markets now look forward to the US Federal Reserve's policy statement on Wednesday, as a massive $600 billion bond-buyback program, the second round of quantitative easing dubbed QE2, is set to conclude by the end of June.
Bullion investors will also pay close attention to talks over US debt limit, as US lawmakers launched a crucial week of debt-reduction talks seeking to break through differences on taxes and healthcare.
Among platinum group metals, platinum was up 1 percent at $1,743.74 an ounce, and palladium gained 2.8 percent to $764.72 an ounce.
Copyright Reuters, 2011