Gold Slips in League With Euro, Outlook Weak

Is China's Gold Fever Over? World Demand Slides
Aaron Tam | AFP | Getty Images

Gold prices edged lower in tight ranges on Friday, with underlying sentiment in bullion weak after the European Central Bank highlighted downside risks to the region's economy.

Gold dipped below $1,668, down about 0.20 percent on the day. U.S. gold futures for April delivery was also weaker from Thursday's close below $1,667 an ounce. Spot silver was mostly flat below $31.50 an ounce.

Gold briefly reacted to euro weakness on Thursday, dropping nearly one percent before rebounding above $1,680 an ounce, as ECB chief Mario Draghi said at a news conference that the central bank will maintain its accommodative monetary policy and highlighted downside risks to the economy.

(Read More: Europe's Economy Still Weak: ECB's Draghi)

But analysts don't expect significant price increases in gold as signs of global economic recovery continue and the euro comes off a recent rally after Draghi's more cautious stance on the currency.

"Investor risk appetite will keep gold in check... and trade will be very much euro driven after Draghi's comments," Commerzbank analyst Eugen Weinberg said.

"Prices struggle to find the catalyst for a rally as there is still a general feeling that the euro zone crisis is tailing off, the global economy is recovering and demand for safe havens is not there."

Chinese export and import data released earlier showed a surge in January, pointing to robust domestic demand and a pick-up in the economy not solely explained by the timing of the Lunar New Year holiday, which begins this weekend.

Above-forecast Chinese data underpinned Asian and European shares, while the euro firmed versus the dollar.

Gold is also weighed by the lack of inflationary pressures in key markets such as Europe, China and the United States, analysts said.

(Read More: QE to Push Gold, Silver Higher: Silver Wheaton CEO)

"Inflation, the other driving factor for gold, is not seen as a threat for the time being and investors look mostly at risky assets like equities or even more industrial metals like platinum and palladium, which are more in focus than gold at the moment," Weinberg said.

On the upside, the SPDR Gold Trust, gold's largest exchange-traded fund (ETF), saw its first inflow since mid-January in the previous session, rising a modest 1.8 tonnes, though holdings are down nearly 21 tonnes this year, compared to a rise of 22.6 tonnes in the same period of 2012.

The iShares Silver Trust saw its holdings up 25.6 tonnes on Thursday, bringing its total inflow for the week to 67.86 tonnes. So far this year its holdings are up 361.42 tonnes.

Platinum, Palladium Fall

Platinum and palladium extended losses, having rallied to their highest level for more than a year and a half earlier this week, as speculative investors started to take profits.

Spot platinum turned lower in jumpy, thin trading to change hands around $1,711 an ounce, having risen as high as $1,740 earlier this week.

Palladium firmed modestly, trading just shy of $750. It touched its highest since September 2011 at $769.50 an ounce on Wednesday.

"Both platinum and palladium would do well from a short-term spec clean out after net length extended aggressively over the last few weeks," UBS analyst Joni Teves said.

"Further downside may be in store up ahead as net speculative positions are reduced, but the weakness should be viewed as a buying opportunity."

However, fundamentals remain strong for platinum group metals, used in auto catalysts and jewellery, due to a more positive economic outlook and mining disruptions in South Africa, as well as a drop in palladium output from Russia.

Gold / US Dollar Spot