Gold edged higher on Wednesday on persistent doubts about Italy's ability to tackle its growing debt crisis as political uncertainty and soaring Italian bond yields prompted caution among investors. Italian Prime Minister Silvio Berlusconi, viewed by many in the markets as an obstacle to economic change, has pledged to resign after parliament passes budget reforms but his exit as leader of the euro zone's third-largest economy raised questions about a successor and possible political instability.
A failure by Italy to fix its debt problems would have a far bigger impact on the region than difficulties in Greece. Gold rose 0.4 percent to $1,791.15 an ounce by 1422 GMT from $1,784.85 late in New York on Tuesday, and was trading just off Tuesday's high of $1,802.60 - its strongest since late September.
Yields on 10-year Italian bonds surged past 7 percent, a level at which countries including Portugal and Ireland were forced to ask for financial help. The soaring yields came amid an investor exodus sparked by a move by clearing house LCH.Clearnet SA to increase the margin call on Italian debt that carried unwelcome echoes of the run-up to the eurozone's sovereign bailouts.
"There is a lot of political uncertainty regarding both Italy and Greece. With (Italian) bond yields going through the roof people are clearly nervous and that is supporting the gold price," said Daniel Briesemann, analyst at Commerzbank. "The market is extremely worried. Changing leaders both in Greece and Italy doesn't change the fiscal situation and leaves us with a period of uncertainty," said Ole Hansen, senior manager at Saxo Bank.
Gold hit a record around $1,920 in September on worries about a growing debt crisis in Europe and is trading more than 25 percent higher in the year to date. Spot gold prices have rallied around 5 percent so far this month as mounting doubts over the eurozone's ability to tackle its two-year-old debt crisis drove investors to safe-haven assets and decoupled gold from other commodities, which it had followed through much of the past two months.
US gold fell 0.3 percent to $1,793.70 an ounce. "The market is now running into the first technical resistances around $1,800 and the rally could slow down a little bit from here," Credit Suisse said in a note. 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.
In Asia, 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 remained 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 other precious metals, silver slipped 0.9 percent to $34.64 an ounce, while platinum fell 1 percent to $1,642.49 an ounce and palladium fell 1.2 percent to $659.97.