Gold edged higher on Thursday, but eased from session highs after the euro declined when the European Central Bank cut its growth forecasts for the region and signalled its role in fighting the debt crisis was over. Risk-linked assets such as the euro, with which gold is at its most tightly correlated in over two years, were boosted by confidence that Greece would complete a bond swap with private investors to avoid defaulting on its debt.
ECB President Mario Draghi doused hopes for more multi-billion euro loans for commercial banks and put the onus back on governments to fight the crisis, following the central bank's decision to leave euro zone rates unchanged. Gold often profits from economic pessimism but its close correlation with the euro tempered gains.
Meanwhile, a group of 30 banks and funds representing 40.8 percent of Greece's 206 billion euros of outstanding debt said they would take part in the deal, joining other Greek and foreign banks and pension funds which have already pledged to accept the offer that expires later on Thursday. Gold usually trades in tandem with the euro, and inversely to the dollar. This correlation has strengthened this week to reach its most positive in over two years, meaning the influence of fluctuations in the single European currency is greater on the bullion price than at any time since January 2010.
Spot gold was quoted up 0.4 percent on the day at $1,690.54 an ounce by 1515 GMT, below an earlier session high at $1,703.41, but having recovered by 2.0 percent since striking a 1-1/2-month low earlier this week. Strong US private employment data on Wednesday fuelled expectations for a robust reading on the broader jobs market with Friday's monthly non-farm payrolls report, which could hamper gold's advance.
"Gold has been very much tracking wider risk assets," Daniel Smith, an analyst at Standard Chartered, said. "I'm in the camp that thinks things are steadily improving." "We have a lot of event risk on Friday, with Greece, US payrolls and also the Chinese data-dump," he said, referring to key Chinese inflation and factory data.
"I tend to think that the environment will improve and gold will actually rally on the back of more confidence. The chance of another big shock from Greece is very low and the US is recovering." he said. Gold has risen nearly 9 percent so far this year, having rallied for 11 years in a row, supported in large part by central banks around the world injecting trillions of dollars of liquidity into the markets to lower interest rates and avoid a steep slowdown in the global economy, after the financial crisis of 2008 and the two-year old euro zone crisis.
Quantitative easing, which keeps interest rates low via central bank purchases of government bonds, has been one of the most gold-supportive policy tools put to use, because of its dampening effect particularly on the US dollar. A Wall Street Journal report that the Federal Reserve may consider sterilising its bond purchases to avoid aggravating inflationary pressures by further expanding its balance sheet, provided a marginal negative note for gold.
Citing people familiar with the matter, the newspaper reported on Wednesday that should the Fed decide to buy more bonds to boost growth, it could borrow back the money it used to buy those bonds for short periods of time at low interest rates. Doing so would take that money out of circulation, or sterilise it.
Holdings of gold in the world's largest exchange-traded products held at a record 70.82 million ounces. ETPs have drawn in well over half a million ounces of gold in the last month, reflecting demand among investors for the metal. Buying in India, the world's largest gold consumer, has been evident for the past week, since the price fell below $1,700 an ounce, according to local dealers.
Silver rose by around 0.1 percent on the day to $33.44 an ounce, bringing the gold/silver ratio - the number of ounces of silver needed to buy one ounce of gold - below 50.0, indicating silver's relative outperformance over gold. In other metals, platinum rose 0.4 percent to $1,632.24 an ounce, while palladium rose 1.0 percent to $687.36 an ounce.