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Gold near 3-month high as investors shun risky assets

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Gold hit three-month highs on Wednesday, buoyed by a slower U.S. services sector and sinking dollar, prompting investors to seek shelter in assets perceived as safer as future Fed rate hikes appeared less likely.

U.S. services sector activity slowed to a near two-year low in January, suggesting that economic growth weakened further at the start of the first quarter.

"Dollar weakness and the poor ISM number are the primary drivers this afternoon," said Mark O'Byrne, research director of bullion dealer GoldCore in Dublin.

Spot gold was up 1.01 percent at $1,140.06, having earlier touched its strongest since Oct. 30 at $1,145.60.


Gold, an asset that thrives on uncertainty, has gained more than 7 percent since the start of 2016 on concerns over the growth outlook, especially in China, after losing 10 percent in 2015.

U.S. gold for April delivery was up 1.1 percent at $1,139.10 an ounce.

"Having January apparently dragged down by manufacturing is concerning," said Rob Haworth, senior investment strategist for U.S. Bank Wealth management in Seattle, referring to data released by the Institute for Supply Management (ISM) that came in below expectations.

"It clearly is helping safe haven demand in the gold market."

U.S. and European stocks came off their lows, while the dollar fell 1.6 percent to a three-month low against a basket of major currencies.

The U.S. Federal Reserve's William Dudley told MNSI that financial conditions have tightened considerably since the Fed raised interest rates in December, and if that persists policymakers would have to take that into consideration when they meet in March. This prompted the market to scale back rate hike expectations.


The near-term outlook for gold will be largely influenced by the pace of U.S. interest rate rises. Higher rates would make gold less attractive as it would increase the opportunity cost of holding non-yielding assets.

Non-farm payrolls data due out on Friday should give a clearer picture of the U.S. labor market.

"I would say it is not really about how strong the U.S. labor market is but about how a slowdown elsewhere could influence the U.S. Federal Reserve," said Simona Gambarini, an analyst at Capital Economics.

Buying by China, the world's top gold consumer, ahead of next week's Lunar New Year holiday, is also underpinning gold, analysts said.

Other precious metals followed gold prices higher.

Spot silver rose 2.76 percent to $14.68 an ounce and palladium gained 3.98 percent to $508.30. Platinum was up 3.25 percent to $877.60.

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