(Reuters) - Gold steadied on Thursday after a deal by European leaders to tackle the euro zone debt crisis encouraged investors to delve back into riskier assets such as higher-yielding currencies and equities and also to boost their bullion holdings
After a marathon meeting in Brussels, euro zone leaders struck a deal with private banks and insurers for them to accept a loss on their Greek government bonds under a plan to lower Greece's debt burden and try to contain the two-year euro zone crisis.
The private sector agreed to accept a nominal 50 percent cut in bond investments to reduce Greece's debt burden by 100 billion euros ($138.2 billion), cutting its debts to 120 percent of GDP by 2020 from 160 percent now.
Global equities .MIWD00000PUS neared two-month highs, while the euro hit its highest since early September, set for its third weekly gain, yet economists warned the plan may not halt the crisis.
Investor risk appetite weighed on the gold price, which usually tends to benefit from uncertainty, although evidence of ongoing demand for physical metal helped contain the slide, leaving spot gold up 0.1 percent at $1,721.89 an ounce at 1125 GMT.
"This morning is all about risk-on. Gold has had a mixed relationship with risk recently -- euro strength has generally been supportive since the September sell-off. But more recently we saw the correlation break down and gold trade as a safe-haven asset once again," said RBS commodities strategist Nikos Kavalis.
"Today the price has come under some pressure but has been supported by good buying from private banks," he added.
"We are looking at ongoing accommodative monetary policy in the U.S. and Europe, and this should continue to help gold. Macroeconomic uncertainty is also supportive - let's not forget that in addition to the European debt problem, we are getting closer and closer to the November 23 deadline for the U.S. debt reduction deal. I cannot be bearish on gold at the moment," he said.
In the United States, a new congressional committee has until November 23 to make recommendations to the Senate and House of Representatives on how to reduce the budget deficit.
GOLD DEMAND FIRM
So far this week, holdings of metal in exchange-traded funds, often viewed as one measure of investor demand for gold, have risen by more than half a million ounces, heading for their largest weekly inflow since the week of August 19 and total holdings are also at their highest since that date at 67.78 million ounces.
Gold ETFs have also pulled in more metal in October than at any time since July as holdings are up by over 700,000 ounces, even though bullion has behaved more like a risk-linked asset, moving in tandem with equities, than at any time in the last five months this week.
Physical demand for gold as well as silver remained robust in Asia, thanks to strong investment demand as well as seasonal buying during the ongoing festival and wedding season in India, the world's largest gold consumer.
"Given positive developments overnight, this means that the logical direction for gold is for a correction up ahead," said UBS analyst Edel Tully.
"But gold's questionable relationship with risk recently means that this trade is not as straightforward as it used to be. Indeed, gold may be viewed as a litmus test for investors' gauge of European credibility: a stronger gold price suggests that the lack of details is a sticking point," she said.
In currencies, the euro hit a seven-week high against the dollar, and riskier currencies rallied as the deal to tackle the euro zone debt crisis prompted an unwinding of bearish positions.
Coming up later in the day is a read of U.S. growth in the third quarter of the year, which is expected to show the economy expanded by 2.5 percent, compared with a 1.3 percent rate in the second quarter.
Consumers and business grew more confident in the three months to September and increased spending, a momentum that economists expect to persist through the end of the year.
In other precious metals, silver eased by 0.1 percent to $33.35 an ounce, while platinum rose 0.4 percent to $1,595.75 an ounce and palladium rose 1.0 percent to $648.22 an ounce. ($1 = 0.724 Euros)
(Reporting by Amanda Cooper; Editing by Jane Baird)