PRECIOUS-Gold hovers above $1,600, recovery hopes offset bargain buys
* Shanghai gold futures, spot contracts drop to multi-month lows
* Stellar stock market performance attracts investors
* Spot gold may test $1,599/oz support - technicals
* Coming up: U.S. FOMC meeting minutes; 1900 GMT
(Adds details, comments; updates prices) SINGAPORE, Feb 20 (Reuters) - Gold struggled to pull significantly above $1,600 an ounce on Wednesday, as ebbing interest in the safe-haven metal amid signs of an improving global economic outlook offset purchases by bargain hunters in Asia. Gold may continue its recent trading pattern in which prices rise initially with support from buyers in China and other Asian countries, and drop after Asian trading hours end, traders said. The most-active Shanghai gold futures contract and two spot gold contracts on the Shanghai Gold Exchange dropped to their lowest levels in nearly seven months, tracking losses in the global market, but the lower prices have attracted strong buying interest. "We have seen quite strong interest in domestic market as prices weaken, although such demand is unable to push prices much higher," a Beijing-based trader said. "Once prices stabilise around this level, we may see demand dwindle. But another sharp retreat or rally in prices will trigger a lot of investment and physical gold demand." Spot gold inched up 0.2 percent to $1,607.86 an ounce to a six-month low of $1,598.04 hit last week. U.S. gold also rose 0.2 percent, to $1,607.60. Technical analysis suggested spot gold is expected to test a support at $1,599 an ounce, a break below which will lead to a further fall towards $1,582, said Reuters market analyst Wang Tao. The formation of a "death cross" on the spot gold chart, with its 50-day moving average dropping below its 200-day moving average, also suggests a pullback could be on the way. However, a Relative Strength Index below 30 since late last week indicates the market has been oversold.
Confidence in economic recovery sent the S&P 500 index and Dow Jones industrial average to their highest in more than five years. S&P 500 has climbed more than 7 percent so far this year, compared with a 4-percent loss in cash gold.
The latest piece of good news on global economy was that German business sentiment soared to its highest level in nearly three years this month, enhancing optimism that the worst of the euro zone debt crisis is over. "The inverse correlation between gold and equities has become very pronounced, as investors gravitate towards high-yielding and riskier assets," said Li Ning, an analyst at Shanghai CIFCO Futures. Investors will be focusing on the wording in the minutes of the U.S. Federal Reserve's latest policy meeting due later in the day to gauge the central bank's attitude towards its monetary policy, which has helped gold's rally in recent years.
"Unless the Fed expresses a very pessimistic view on the economic outlook, gold is unlikely to react with a strong rally," Li added. Holdings of SPDR Gold Trust, the world's top gold-backed exchange-traded fund, dropped more than 3 tonnes from the previous session to 1,319.964 tonnes on Feb. 19, the lowest level in nearly five months. Anglo American Platinum expects operations at its South African mines to resume on Wednesday after workers staged a one-day walk-out following union violence at one of its mines, a spokeswoman said. Spot platinum edged up 0.2 percent to $1,691.74 an ounce.
Precious metals prices 0254 GMT
Metal Last Change Pct chg YTD pct chg Volume Spot Gold 1607.86 3.65 +0.23 -3.98 Spot Silver 29.56 0.14 +0.48 -2.38 Spot Platinum 1691.74 3.99 +0.24 10.21 Spot Palladium 762.47 1.25 +0.16 10.18 COMEX GOLD APR3 1607.60 3.40 +0.21 -4.07 9514 COMEX SILVER MAR3 29.54 0.12 +0.40 -2.28 3826 Euro/Dollar 1.3418 Dollar/Yen 93.48
COMEX gold and silver contracts show the most active months
(Editing by Himani Sarkar)