Gold headed towards its strongest weekly rise in over a month on Friday, following a decline in the dollar ahead of a G20 meeting that will be dominated by the eurozone debt crisis. This week's downgrade to Spain's sovereign debt and a last-minute decision to grant Greece another tranche of its agreed bailout money despite Athens missing the deficit targets set by its international creditors have fuelled investor alarm over the eurozone's finances and pushed gold up by 3 percent.
The key driver to the rally in the gold price has been a 0.5 percent slide in the value of the dollar this week. A weaker US currency tends to push up the price of gold as it becomes cheaper to non-dollar buyers. Spot gold was last up 0.7 percent at $1,677.49 an ounce at 1403 GMT, from $1,666.20 late in New York on Thursday. "This is all dollar-driven and I haven't seen anything else that would tell me otherwise," said ANZ head of metal sales Peter Hillyard.
"We think (gold) can go higher, but we need to see some indication that it's under way and that clearly hasn't been seen yet and that is the mood. People are a little nervous about what to do," he said, adding a break above $1,700 an ounce could entice more players back into the market.
Anecdotally, traders and analysts have said part of the problem with determining the near-term price outlook for gold has been the lack of conviction among usual investors to participate more actively in the market while uncertainty over Europe continues to run so high. Decreasing liquidity tends to result in elevated volatility, which in gold hit a 2-1/2 year high in the early part of this month before subsiding.
The average daily volume in trading of US gold futures this year accounts for about 17.5 million ounces of gold. Daily volume in gold futures has topped this figure on just one trading day so far this month. Exchange-traded funds, another gauge of investor involvement with gold, have registered almost no change in the amount of metal held by these products this month, following a decline of nearly half a million ounces in September.
"Gold is no longer viewed exclusively as the anti-risk trade. Instead, gold has been moving in positive correlation with risk assets of late. This suggests that there is hybrid space that gold will occupy in the months ahead - one which benefits from a degree of increasing cyclical risk and a sufficient dose of sovereign risk, although at times that balance may become difficult to fathom," said UBS in a note, in which it signalled a cut to its average gold price target for 2011 to $1,615 from $1,665.
The bank said its physical gold sales to India so far this year rose 10 percent on the year, suggesting resilient buying interest in the world's biggest gold consumer in the face of higher prices. Spot platinum rose 1.5 percent to $1,550.24 an ounce, posting its biggest weekly rise in about two months and snapping five weeks of consecutive losses, while silver rose 1.7 percent to $32.31 an ounce. Spot palladium climbed nearly 4.0 percent to $611.47 an ounce. It is up 2.4 percent so far this week, also reversing five weeks of falls.