Gold Prices Rise 1% on Slovak Rejection of Stronger Bailout Fund

Gold prices rose 1 percent in Europe on Wednesday as the dollar fell to a three-week low against the euro, and after the Slovak parliament's rejection of a plan to expand the bloc's rescue fund stoked concerns over the euro zone debt crisis.

Physical demand for the precious metal also remains strong in Asia, dealers said, and is expected to remain so as the Indian festival season gets underway.

Spot gold was up 0.8 percent at $1,678.29 an ounce at 0855 GMT. Prices have stabilized after last month's unprecedented volatility, which saw prices fall 20 percent from record highs. They are up nearly 3 percent in October.

The euro rose against the dollar early on Wednesday as speculators bought the currency to try and trigger a reported option barrier at $1.3700.

The single currency slipped in earlier trade as fragile risk sentiment soured after the Slovak parliament rejected a plan to expand the euro zone rescue fund.

Slovakia's main opposition party was likely to support the rescue fund measure in another vote this week after the government has resigned, but the twist has added to market nervousness.

There is a feeling out there that the dollar may just weaken a bit further as investors had gotten themselves too long, too quick, said Saxo Bank senior manager Ole Hansen. If that pans out, gold could test a bit higher.

Stock markets will be facing a lot of resistance soon and the fear is that we could see another leg down, which will remove support for commodities, he added. The Slovakian vote brought back some safe haven interest in gold, but I think it will be short-lived.

European shares reversed early losses to turn higher, meanwhile.

Gold has moved in line with other commodities and assets seen as higher risk, like stocks, in recent weeks, despite moving in an inverse relationship with them earlier in the year as buyers sought the metal as a haven from risk.

Gold has stepped into new territory, acting like a hybrid of a risk asset and a safe haven, as it tries to find a balance between the two opposing forces, said UBS in a note.

This has made trading the yellow metal very challenging, as while one can have a view on an event such as U.S. payrolls for example, deciphering how gold reacts has become a lot more difficult, it added.

And while buyers are nimbly returning, it is no surprise that there is caution given the struggle for conviction.

U.S. gold futures for December delivery were up $19.60 an ounce at $1,680.60.

BUYING EXPECTED TO HOLD STRONG

Gold prices are expected to remain firmly underpinned as long-term investors buy the precious metal to diversify their portfolios. Central banks, particularly those in emerging markets, are seen adding further to their reserves.

Metals consultancy GFMS said on Wednesday that central banks could buy nearly 500 tonnes of gold this year, up from an estimate of 336 tonnes it made last month, as economic turmoil boosts the metal's safe-haven appeal.

Demand from smaller investors in Asia was also firm, meanwhile. Premiums in Singapore and Hong Kong remained at high levels because of the short supply of physical materials.

The premiums are about $2.50, as most dealers are still filling the orders that were pre-booked a week or two ago, said the dealer. The buying has slowed down a bit in the past two days, but the Thais are still looking at buying on dips.

Dealers in Hong Kong said premiums were as high as $4.50 an ounce above spot prices, as demand from mainland China stayed robust after the National Day holiday last week.

Chinese demand is likely to remain strong until the end of the year, said a Hong Kong-based dealer.

Among other precious metals, silver tracked gold higher, up 1.2 percent at $32.55 an ounce. Spot platinum was up 1.7 percent at $1,539.50 an ounce, while spot palladium was up 1.5 percent at $610.72 an ounce.

In the longer run, structural support for platinum could emerge, said Ross Norman, chief executive of precious metals broker Sharps Pixley.

As (the) platinum price is approaching its marginal cost of production and cash cost is rising by about 10 percent per year according to BNP, supply can eventually be restricted and price supported.