Gold holds around $1,235 per oz as debt fears rise

Gold held near $1,235 an ounce today, with demand for the metal as a haven holding firm as widening spreads between Spanish and German government bond yields pointed to concern over European debt levels.

Spot gold was bid at $1,234.35 an ounce at 1215 GMT, against $1,232.45 late in New York on Tuesday. US gold futures for August delivery rose $1.60 to $1,236.1.

"The whole sovereign debt situation lingers on," said Ole Hansen, senior manager at Saxo Bank in Copenhagen. "There will be persistent fear that some government debt in Europe will have to be readjusted, and that will lend support [to gold]."

"It is relatively easy to drive gold higher as we are getting into the summer period, when anything can happen because it is characterised by high volatility and low activity," he said.

The premium demanded by investors to hold 10-year Spanish government bonds over German Bunds rose to a euro lifetime high on Wednesday as investors grew nervous about Spain's credit markets.

The widening spreads pulled the euro back from the two-week high it hit against the dollar earlier.

A weaker euro, and consequently stronger dollar, has historically been bad for gold, but the precious metal has recently started to move more in line with the US currency as both benefit from risk aversion.

European shares pared early gains to turn flat, breaking a five-day winning streak. The wider markets are awaiting US data due later, including the May producer price index reading at 1230 GMT.

Interest in physical gold kept holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, at a record 1,306.137 tonnes on Tuesday.

There are concerns that gold may be overvalued at current levels after reaching a record $1,251.20 last week.

The chief executive of PIMCO, the world's biggest bond fund, said on Wednesday that the fund had cut exposure to gold on valuation. "At some point valuations became expensive and we halved our exposure to gold," Mohamed El-Erian said.

High prices are weighing on demand for gold in some traditionally key bullion markets, such as India and the Middle East, and encouraging more selling of scrap gold.

Istanbul Gold Exchange chairman Osman Sarac said today that Turkey's 2010 gold imports will not exceed 2 tonnes, versus an earlier forecast of 40 tonnes.

Turkey's gold imports till the end of May totalled 1.17 tonnes.

Among other precious metals, silver edged up to $18.50 an ounce against $18.49 yesterday.

The gold-silver ratio — how many ounces of silver are needed to buy an ounce of gold — fell to its lowest this month today, meaning the metal is becoming increasingly expensive compared to gold.

Platinum was at $1,569.45 an ounce against $1,572.50, while palladium was at $468.63 against $469.50.

Both metals have benefited this year from expectations that demand will continue to improve, both from car makers — the main consumers of the white metals — and investors, who have moved into new platinum group metals-backed exchange-traded funds.

"Demand from auto catalyst producers is set to rebound this year," said Bank of America-Merrill Lynch in a weekly report. "The platinum market is too small to sustain several ETFs, and inflows into these vehicles are set to support prices."