By Frank Tang
NEW YORK | Fri Oct 22, 2010 2:42pm EDT
Any currency reaction to the G20 meeting in South Korea this weekend could provide fresh impetus to the gold market.
Analysts, however, said it is unlikely for members to reach a deal on a U.S.-led initiative for a commitment from emerging countries to allow their currencies to rise.
"I don't think there was an expectation that they will come up with a grand solution because everybody does have a different interest," said Axel Merk, portfolio manager of Palo Alto, California-based Merk Mutual Funds.
"It's just the very beginning of a currency war. It's going to take a while to brew over. I have no doubt gold will be the beneficiary in the long run," he said.
Gold was more than 3 percent lower this week, after China's surprised rate hike sent the dollar up 0.7 percent since Monday. The inverse correlation between gold and the dollar has been the closest in a month, Reuters data showed.
Spot gold was up slightly at $1,323.81 an ounce at 1:44 p.m. EDT, having earlier fallen to a 2-1/2 low at $1,315.09. U.S. gold futures for December delivery fell $1.30 an ounce to $1,324.30.
The dollar was on track to snap a five-week losing streak against major currencies as traders took profits ahead of possible news from the G20 meeting and the euro repeatedly ran into technical resistance above $1.40.
Standard Chartered analyst Daniel Smith said the dollar has been a very important driver and gold could see more weakness in the short term.
"I think the price has run up too fast and we're just going through a period of consolidation now," Smith said.
Spot prices rallied sharply to a record $1,387.10 an ounce late last week but have struggled to maintain traction as the dollar rebounded from lows amid fears expected U.S. monetary easing had been too heavily priced into the market.
Although significant action is not widely anticipated, traders are awaiting a forthcoming Fed policy meeting that could result in further quantitative easing.
The dollar's strength has led to a 3.3 percent drop this week in gold, roughly matching the metal's last significant weekly decline in early July.
Good physical demand from traditional bullion-buying centers such as India is strengthening as prices descend.
Dealers in India reported they were continuing to stock up for forthcoming festivals, including the Hindu festival of Diwali, a major gold-buying events, as prices corrected this week.
GOLD DOWN FOR FIFTH SESSION
The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, saw a further drop in its holdings on Thursday, however. Gold held by the fund dropped 0.9 tonnes, its 11th session of outflows in 15.
Despite a five-day losing streak, SPDR Gold's bullion holdings were only 6 tonnes below its recent peak, a relatively small decline for the fund.
Among other precious metals, silver was 0.3 percent lower at $23.12 an ounce, its biggest weekly loss since early July as it followed gold prices lower.
"As usual silver has been underperforming during the correction just like it has been outperforming during the recent rally," said Saxo Bank senior manager Ole Hansen in a note on Friday.
The ratio of gold to silver -- the number of ounces of silver needed to buy an ounce of gold -- rebounded from its lowest in more than two years to reach a 10-day high at just over 57 to 1 on Friday as silver underperformed gold in a falling market.
Elsewhere platinum edged up 0.3 percent at $1,670.92 an ounce, while palladium gained 1.1 percent to $587.80.