Gold Prices Rise on Softer Dollar

(REUTERS) -- Gold rose in Europe on Wednesday, helped in part by a softer dollar, as investors sought clarity on prospects for a second Greek debt bailout and the outlook for growth in the euro zone.

Investors noted that bullion recently has not behaved typically as a safe-haven but has risen and fallen in tune with the euro, stock markets and other so-called risk assets, although this correlation did erode to an extent during the day.

The single currency eased on the day, having recently hit two-month peaks, after the risk grew of a delay to Greece's much needed 130-billion euro lifeline, while the dollar eased against a basket of major currencies. .DXY

Spot gold was up 0.7 percent at $1,730.90 an ounce by 1552 GMT, while the most-active April COMEX gold futures contract was up 0.9 percent at $1,732.90.

The metal has gained about 10 percent in the year to date.

Gold does appear to be moving away from being completely denominated by risk-on, risk-off sentiment, HSBC analyst James Steel said.

I'm bullish gold, he added. It might visit down to low $1,700s again ... $1,802 and $1,803 have been the two previous highs and the market might have to get over there, he said, noting robust demand for bars and coins and resurgent demand in emerging economies.

Gold priced in euros, often used as a gauge of European investor appetite for bullion as it strips out the effect of the U.S. dollar to an extent, rallied by more than 1 percent on the day above 1,300 euros an ounce.

The correlation between gold in the short term and some of the risk markets is higher than people probably expect, said Pau Morilla-Giner, head of equities, commodities & alternative investments at London and Capital Asset Management.

Below the surface ... gold continues to trade about 60 to 70 percent of the time as an alternative currency, which clearly has to do with being a better store of value than nominal currencies that are being abused by excessive quantitative easing (QE) across the board, he added.

Data released earlier showed the euro zone economy had shrunk by 0.3 percent in the last three months of 2011, with the sovereign debt crisis crushing a recovery, but a north-south divide was evident as France grew while Italy slumped.

Mitsubishi analyst Matthew Turner noted that a scenario in which Greece leaves the euro area would be uncharted territory, and that for gold to make further gains, an improvement in the overall economic backdrop would need specific characteristics.

It was the case last year that gold didn't do very well on bad news that was deflationary, whereas it does do well on bad economic news that is inflationary, Turner said.

Gold might struggle a little bit if things do get better, but I'm skeptical that they will get much better. I think perhaps we'll see a slowdown in the economy again in Q2, Q3 and that might start to raise hopes of more QE.

Injecting cash into the economy with quantitative easing is gold-friendly as it supports ultra low interest rates.

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Euro zone GDP growth and PMI: link.reuters.com/rap94s

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Hedge fund manager and long-time gold bull John Paulson cut his gold ETF bullion holdings by about $600 million in the fourth quarter, a second straight reduction that was probably driven by client redemption needs as he remained upbeat on the metal.

However, Paulson's selling in the SPDR Gold Trust was more than offset by buying by other investors, reflecting long-term confidence in gold.

Spot platinum rebounded after hitting a one-week low of $1,615.98 in the previous session, rising 0.5 percent to $1,631/50.

Silver was virtually flat on the day, at $33.56 an ounce, while palladium eased 0.2 percent to $680.72.