Gold set for biggest weekly gain in 10 months on risk aversion

[LONDON] Gold edged down on a modestly higher dollar on Friday, but looked set to post its best week in 10 months, as investors sought safety from volatility in equity and currency markets after Switzerland unexpectedly abandoned a cap on the franc.

Spot gold was down 0.2 per cent at US$1,259.27 an ounce by 1105 GMT. The metal had posted its biggest daily gain in six weeks on Thursday, up 2.6 per cent, hitting a four-month high of US$1,266.11 after the Swiss National Bank's move.

It was heading for its biggest weekly jump since March 2014, up nearly three per cent.

US gold futures for delivery in February were down 0.5 per cent at US$1,258.00 an ounce. They had gained 2.5 per cent on Thursday.

Volatility in global markets on Thursday prompted investors to channel money towards gold, often seen as an alternative investment to riskier assets.

Dealers assumed the SNB had moved with the knowledge that the European Central Bank would take the plunge into full scale quantitative easing at its policy meeting on Jan. 22.

Gold has benefited from years of increased central bank liquidity following the 2008 financial crisis, but more monetary stimulus in the euro zone could result in a stronger dollar, in turn weighing on gold prices.

"We've had a very modest pullback in the gold price so far today and the question now is: has the market priced in the ECB QE?," Citi analyst David Wilson said.

"The drivers for gold at the moment seem to be more about the risk aversion."

The dollar was up 0.1 per cent versus a basket of main currencies, European shares fell on Friday after a late rebound on Thursday, while the benchmark 10-year US Treasury yield was hovering around the lowest level since May 2013 hit on Thursday at 1.7 per cent.

In a reflection of improving investor confidence, holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 1.35 per cent to 717.15 tonnes on Thursday.

"Gold may be lifted further as the repercussions of the SNB action continue to reverberate in the markets and portfolio and real money managers decide on how to allocate holdings in light of franc developments," said HSBC in a note.

Physical demand, however, has seen a setback with the higher prices putting off buyers in Asia, the top consuming region.

Premiums on the Shanghai Gold Exchange fell to US$1-US$2 an ounce over the global benchmark, from about US$3-US$4 in the previous session, indicating softer demand.

Silver was unchanged at US$16.86 an ounce, platinum was down 0.2 per cent at US$1,251.99 an ounce and palladium was flat at US$762.80 an ounce.

REUTERS