Gold Dips as Libya Peace Plan Saps Safe-Haven Bid
Gold slipped on Thursday after the Arab League said a Venezuelan proposal to end the Libyan conflict was under consideration, but uncertainty over the future of the region kept prices in sight of record highs.
Arab League Secretary General Amr Moussa told Reuters on Thursday that the a plan to bring peace to proposed by Venezuelan leader Hugo Chavez was "under consideration."
While this has eroded some of the safe-haven demand that has shot gold and the Swiss franc to all-time highs this week, financial markets are on edge, as reflected by volatility indices such as the VIX hovering near 3-1/2 month highs.
Spot gold, which has risen by 10% in the six weeks since the unrest in Tunisia and Egypt spilled into Libya, Yemen, Bahrain and, most recently, Oman and Iran, hit a record $1,440.10 an ounce on Wednesday.
The gold price was last down 0.4% at $1,428.66 an ounce at 1145 GMT, while U.S. April gold futures were down 0.6% at $1,429.30.
"I doubt a Chavez-brokered deal would have much impact from a political perspective as he has little legitimacy in the international political sphere," said Cedric Chehab, head of commoodities analysis at Business Monitor, a research group.
"In terms of risk, we expect any rise in tension to raise oil prices, which will likely see risk aversion rise, and result in lower commodity prices, particularly for those correlated to risk appetite and the industrial cycle such as base metals. Gold and silver would remain supported as investors continue to move into 'safe haven' assets," he said.
Analysts said after having rallied in four of the past five sessions, a modest decline did not signify the recent rally was over.
"That's to be expected anyway, with gold having done quite a lot over the last couple of weeks and set a new high. I don't think it should be a surprise to see some consolidation at the very least," said Credit Suisse analyst Tom Kendall.
"The Middle East has certainly been a big factor for gold over the last few weeks," Kendall said. "If the situation deteriorates, say in some of Libya's neighbours or if we saw more widespread protests in places like Bahrain or Saudi Arabia, then for sure you'd see another reaction in the energy markets and in gold."
Brent crude dropped by as much as $3 before recovering to near $115, which in turn boosted European shares, while the euro hovered near four-month highs ahead of a European Central Bank rate meeting.
Investors are braced for what could be one of the most important ECB meetings this year, in which the bank is expected to step up its anti-inflation rhetoric and may phase out some of its crisis support measures.
Most economists do not expect rate hikes to materialise until at least October.
But at the very least there is a high chance the ECB will restrict the amount of funds available at its three-month liquidity tenders as it withdraws the emergency lifelines put in place during the depths of the financial crisis.
Rising interest rates can undercut gold's appeal among investors as it bears no yield of its own. But the subsequent boost such an indication from the ECB could give the euro against the dollar could prove supportive.
China, which has raised interest rates twice in the past six months and increased bank reserve requirement ratios eight times since the start of 2010, will probably raise them again this month, as the world's second-largest economy battles stubborn inflation.
Silver fell 0.5% to $34.51 an ounce, but held just shy of Wednesday's 31-year high at $34.96.
Platinum eased 0.1% to $1,843.49 an ounce, while palladium was up 0.1% at $817.72.