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Gold rises as euro zone debt fears linger

Gold firmed on Thursday as persistent fears over euro zone debt levels underpinned prices, though a recovery in risk appetite kept the metal below the previous session's 2010 highs.

Gold on Wednesday hit its highest this year at $1,174.18 (U.S.) an ounce after Standard & Poor's cut its credit ratings on Spain, a day after downgrading the ratings for Greece and Portugal.

But an upbeat outlook on the U.S. economy from the Federal Reserve later sharpened appetite for assets seen as higher risk, such as equities, taking some momentum away from gold.

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Spot gold was bid at $1,167.25 an ounce at 1414 GMT, against $1,164.45 late in New York on Wednesday. U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange dipped $3.90 to $1,167.90.

"Gold has benefited from the sovereign debt problems, which reached a head the day before yesterday," said Credit Agricole analyst Robin Bhar.

"We have had some calmer markets since the first wave of panic hit the markets, then subsided. But it is still supported by those fears."

The euro rose on Thursday, rebounding from the previous day's one-year low on hopes a bail-out plan for debt-stricken Greece would be finalised soon.

Equities also climbed on Wall Street and in Europe as the Fed's more upbeat view of the U.S. economy eclipsed the euro zone's debt issues. Oil prices rose sharply.

Assets seen as higher risk such as the euro, stocks and commodities were sold after Standard $ Poor's downgraded Spain, but the news lifted gold. The metal remains well-supported above $1,165 as fears persist over the outlook for the euro zone.

"Eventually things are going to get worse," said Patrick Armstrong, managing partner of London-based Armstrong Investment Managers. "Countries don't get out of this kind of debt spiral without defaulting or having inflation."

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Inflationary Pressures

"We think defaults are less likely, but inflationary pressures are going to shoot up a lot in the next decade," he added. "We think inflation is the endgame for almost every Western central bank. That's why we have big positions in gold and precious metals as an alternative to sovereign currencies."

Investment interest in gold was firm, with holdings of the world's largest gold exchange-traded fund, the SPDR Gold Trust , hitting a record 1,152.9 tonnes on Wednesday.

Holdings of a London-based gold ETP operated by London's ETF Securities also rose 29,450 ounces on Wednesday to 3.521 million ounces, their highest since October last year.

But high prices weighed on jewellery demand in major consumer India, with traders taking to the sidelines for a third day as prices traded above the 17,000-rupee mark, dealers said.

Among other precious metals, silver was at $18.18 an ounce against $18.06, platinum at $1,713 an ounce against $1,707, and palladium at $546.50 against $538.50.

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Holdings of ETF Securities' London and Zurich palladium ETPs saw an outflow of nearly 7,000 ounces or 1.1 percent as of Wednesday. Investment in products like ETPs has been an important source of demand for the metal this year.

"Now that short-term sentiment towards platinum and palladium has been clouded by risk aversion stemming from the Eurozone's debt crisis, ETFs are potentially at risk of liquidation," said UBS analyst Edel Tully in a note.

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