Gold prices rose in choppy trade Thursday, rebounding after the previous sessions' losses, helped by a bounce of U.S. Treasury prices and as a dollar rally lost momentum.
Benchmark Treasury yields fell from a six-month high after a successful 30-year bond auction, retracing the dramatic sell-off earlier this week fueled by inflation and deficit fears on a deal to extend federal tax cuts.
The dollar also erased initial gains as Treasury yields fell, after rising in the previous sessions on hopes of improving U.S. economic growth on the tax stimulus.
Gold has reasserted its role as a safe haven after the combined effect of rising U.S. short-term interest rates and a stronger dollar prompted profit-taking in the past two days.
"If people don't have confidence in the value of the currency, it doesn't matter if Treasury yields go up. Because, if the currency is going to lose value, the yield has to go up significantly to compensate for any ... declining value of the dollar," said Miguel Perez-Santalla, vice president of sales of Heraeus Precious Metals Management in New York.
"People are not bailing out on gold to get into Treasuries. Gold right now is still the place for safe haven," he added.
Renewed euro zone worries benefited gold after ratings agency Fitch downgraded Ireland's sovereign debt rating after an opposition party there said it would vote against a bailout package for the debt-laden country.
Spot gold rose 0.7 per cent to $1,391.65 an ounce at 1:06 p.m. EST. U.S. February gold futures rose $10.10 to $1,393.30 an ounce.
The so-called opportunity cost of owning gold – the yield investors forfeit for holding a non-interest bearing asset – rises in tandem with bond yields and investors have seen that cost automatically spiral this week as Treasuries have fallen.
"We suggested recently that higher interest rates pose one of the more significant potential headwinds for spot gold prices, and the sharp rise in yields to six-month highs does appear to be slowing gold's recent ascent," said Nic Brown, Natixis commodities strategist.
Gold lost some safe-haven appeal this week as, for the first time in weeks, euro zone debt concerns were placed on the back burner and investors focused on U.S. economic fundamentals in a thinning market.
However, rebounding Treasury prices prompted investors to re-focus on economic uncertainty due to widening U.S. deficits and sovereign debt worries.
"The bias is certainly towards risk-on again, and it's a function of having a couple of points of (U.S. economic) growth added on because of the extension of the ... tax cuts," said Daniel Brebner, a strategist at Deutsche Bank.
"There's certainly lots of risk around. Debt is becoming an issue in both Europe and the U.S., but right now the macroeconomic policy is towards growth, and I think the market is reflecting that."
NEAR RECORD
Gold hit its record $1,430.95 an ounce on Tuesday, fueled by a flurry of fund-buying ahead of the year-end and a resurgence in risk aversion stemming from Europe's deepening debt crisis, which has pummeled the government bonds of the euro zone's most economically fragile members.
With the 3 per cent decline over the past three days, however, physical demand has resurfaced, particularly in Asia, where premiums for physical delivery in Hong Kong held steady, while scrap supply was muted.
Spot silver rallied 1.8 per cent to $28.84 an ounce, after declining to a one-week low of $27.96 on Wednesday.
Platinum fell 0.3 per cent to $1,676 an ounce, while palladium rose 2.1 per cent to $739.22, taking some heart from the rise in other industrial commodities such as crude oil and base metals.