Gold Nearly Flat; Central Banks Add to Holdings

Gold prices pared gains to trade around $1,760 on Tuesday as the euro hit session highs versus the dollar, and following data that showed central banks added to their bullion holdings in July and August, led by South Korea and Paraguay.

The metal has risen nearly 5 percent so far in September and is set for a fourth straight monthly gain on expectations the Federal Reserve will keep credit flowing through the U.S. economy and interest rates low by buying government bonds.

The Fed’s pledge to buy $40 billion in mortgage-backed securities each month as long as job creation remains sluggish should protect gold from severe sell-offs, analysts say.

Spot gold was flat at $1,763 an ounce.

"The market has already come up 12 percent since mid-August, so that’s a pretty good rate of return over six weeks or so," Credit Suisse analyst Tom Kendall said. "I think it’s natural to expect some consolidation before it pushes up through $1,800."

"But the pull is definitely to the upside now. Whether you’re looking at physical flows into ETFs or the options market, activity has clearly been on the bullish side, and that will see prices move higher as we go through the fourth quarter," he said.

In the shorter term, gold took support from a recovery in the euro, which swung higher against the dollar in early afternoon trade and extended gains after data showed U.S. house prices rose less than expected in July.

European shares also moved in positive territory, while other commodities, like crude oil and industrial metals, rose.

Central Banks Buy

Data from the International Monetary Fund on Tuesday showed South Korea raised its holdings of gold by nearly 16 tons in July, along with Paraguay, which raised its reserves in July from a few thousand ounces to more than 8 tons, continuing the trend among central banks to hold more bullion.

According to the IMF’s international finance statistics report, South Korea added 15.988 tons of gold to bring its holdings to 70.44 tons in July, meaning it has doubled its bullion reserves in the space of a year after being one of the largest purchasers of gold in 2011.

Paraguay raised its holdings by 7.527 tons to 8.194 tons two months ago, while Venezuela cut its holdings by 3.733 tons to 362.053 tons in that month.

So far this year, central banks have added a net 262.1 tons to their reserves, compared with 203.39 tons in the first eight months of 2011.

Turkey has added the most to its holdings, having raised its reserves by 100.2 tons in the first eight months of the year, followed by Russia, which has added 53.75 tons.

Private investors have also added to their holdings of gold through exchange-traded funds backed by physical metal, which now hold a record 74.06 million ounces.

"We still prefer to be buying gold on dips and believe the break higher will eventually come. But the futures market needs to lose some speculative length and the physical market needs to adjust to a higher price-range first," Walter de Wet, an analyst at Standard Bank, said in a research note.

He said he expected gold to reach $1,900 in the latter half of the fourth quarter.

In other precious metals, palladium was 0.3 percent higher on the day at $642 an ounce.

On Monday, the price fell by more than 4 percent, its largest one-day decline since early March, in what traders and analysts said was a bout of technical selling that gathered pace after the price broke through the 200-day moving average.

Platinum edged up by 0.7 percent to $1,626 an ounce, while silver rose by 0.1 percent to nearly $34.