Jewelry demand supports gold but dollar at risk

By Jan Harvey - Analysis

LONDON (Reuters) - Resurgent demand from jewelers and strong technical support have arrested a recent sharp slide in gold prices, but more losses are likely if the dollar keeps rising and exchange-traded funds lose faith in the metal.

Gold, a key player in the commodities boom earlier in the year, has turned in recent weeks into one of its most visible losers.

Prices slid 17 percent in the last four weeks to a nine-month low of $773.90 an ounce on Friday as a firmer dollar, falling oil prices and losses in industrial precious metals such as silver and platinum weighed on the market.

They have since ticked back up, hitting $817.80 on Wednesday, as physical demand rebounded and the dollar retreated. But risks to the precious metal remain if the greenback firms again.

"While the dollar is strong, that could well point to more declines to come in gold," said UBS strategist John Reade.

The dollar has been boosted by weak economic indicators from the euro zone in particular, which have fuelled fears the U.S. economic slowdown is spreading to other areas of the globe.

While the outlook for the U.S. and the dollar are murky, traders are concerned other currencies could fare even worse. Just as the dollar's weakness boosted gold earlier in the year, its recent move up has pushed the precious metal lower.

The firmer dollar has pulled gold more than 25 percent from its all-time high of $1,030.80 an ounce it hit in March, and its rise appears to be hitting investor interest in gold.

Data released by the U.S. Commodity Futures Trading Commission last Friday showed open interest in the gold futures market has shrunk as investors cut their commitments to buy.

ETF OUTFLOWS

Gold held by the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust GLD, has fallen by more than 50 tonnes since their all-time high in mid June.

The trust saw a 1 percent outflow in its gold holdings on August 19, its first in nearly two weeks.

ETFs are trusts that issue securities backed by physical commodities. ETF investment has been a major source of demand for gold in recent years, but investors fear if funds start selling their gold stocks in earnest, spot prices could fall.

"One big thing for the gold market is what the ETFs will do," said Commerzbank senior trader Michael Kempinski. "If they are patient and believe in the (market) we could see upside again. But if they don't, I'm really sceptical."

A dip in oil prices, which have also slipped sharply from record highs, is also weighing on the market.  Continued...