A graph with gold bars in the foreground
* European summit on EFSF, Oct. 23
By Amanda Cooper
LONDON, Oct 21 (Reuters) - Gold rose on Friday but was still
set for its largest one-week fall in a month, as growing
uncertainty among investors over the ability of European leaders
to deliver a comprehensive solution to the debt crisis kept the
price near two-week lows.
Disagreement between Germany and France, the biggest
contributors to the euro zone bailout mechanism, over how to
structure the fund to effectively stem the spread of the crisis
has prompted investors to attach a diminishing chance of a
resolution any time soon.
Increasingly dire warnings from ratings agencies over the
impact on the creditworthiness of not just vulnerable euro zone
members such as Spain, Italy and Portugal, but also others such
France, have added to the desire among investors to hold
non-euro assets, denting the euro and causing European stocks to
underperform their U.S. equivalents.
Gold has increasingly performed like a risk-linked
commodity and seen its correlation to European stocks reach its
strongest in six months and that with copper rise to an 11-month
peak. Yet it has seen strong demand from Asian consumers, which
has pushed premiums to their highest since the start of the
year.
Spot gold was last quoted up 0.3 percent on the day
at $1,622.70 by 0950 GMT, but set for a 3.5 percent fall this
week.
"At the end of the day, gold has got the physical business
that comes in on the dips, as well as investors so that should
hold it there, but even if we do come back to $1,550 or $1,500
again, if we get some more funding crises, you have to think
there will be even stronger support down at those numbers, so
I'm not too worried," said Credit Agricole analyst Robin Bhar.
"Is gold going to get back up to the highs? That's looking
less certain now. It's not on the agenda, although you can never
say never."
The euro has fallen by nearly 1 percent this week,
while European equities have lost 2.4 percent, compared
with a loss so far of just 0.8 percent in the Standard & Poor's
500 .
Highlighting the investor pull out of gold this
week, the price of bullion in most major currencies has fallen
this week between 2.5 and 4.0 percent, while traded volumes in
the most-active U.S. gold futures contract <GCv1> have run as
much as 55 percent below their 30-day rolling average so far
this month.
ETFS STEADY
Investor interest in gold-backed exchange-traded
products has materialised in a second consecutive weekly inflow
of metal, with most inflows coming into European-based funds,
which have added more than 135,000 ounces to their holdings this
week.
This month, global gold ETF holdings are set for their
largest net increase in three months, having risen by more than
170,000 ounces to 67.229 million ounces .
European leaders gather in Brussels this weekend
to try to put together a comprehensive package of measures to
keep heavily indebted countries such as Greece solvent and
prevent the debt problem spreading to neighbouring nations with
fragile finances.
Deep divisions between France and Germany mean they will
make scant progress on strengthening the euro zone bailout fund
at a summit on Sunday in a sign that Europe's leaders are still
some way from getting a grip on the bloc's debt crisis.
This uncertainty has put most asset classes under pressure
this week and has clouded the outlook for the gold market, which
relies usually on a degree of investor desire for relatively
less risky assets in a turbulent market environment.
Gold's safe-haven properties have taken a backseat to those
of the dollar as investors have shunned euro-denominated assets,
which in turn has posed a stiff headwind to the bullion price,
as this tends to benefit from a weaker U.S. currency.
"The question in everyone's mind is of course: 'how long
will this phase last?' No one can know for sure, but we can
identify at least two potential catalysts to watch that could
help gold to reclaim its safe-haven status," wrote UBS analyst
Edel Tully in a note, adding the catalysts were renewed dollar
weakness and a breakdown in the correlation of gold with risk.
Silver , which can move in lockstep with gold but more
frequently tracks base metals, has fallen by more than 4.0
percent this week. It was last up 0.7 percent on the day at
$30.71 an ounce.
Palladium was last up by more than 2 percent on the
day at $596.22. The price has dropped by 4.1 percent to two-week
lows as concern has increased over the outlook for demand,
particularly following a soft read of Chinese economic growth,
which is key for car sales in the world's largest auto market.
Palladium relies heavily on China as a source of demand for
the metal in catalytic converters fitted in gasoline-powered
vehicles.
Platinum was last flat at $1,491.0 an ounce.
(Editing by James Jukwey)