LONDON (Sept 5): Gold prices recovered from near three-month lows on Friday as a stock market rally sparked by a European Central Bank rate cut ran out of steam, but gains were capped ahead of key U.S. payrolls data later in the day.
The metal hit its weakest since mid-June earlier on Friday at $1,256.90 an ounce, and remains on track to end the week lower on the back of rising equities and signs that the U.S. economy is improving.
Spot gold was up 0.3 percent at $1,264.30 an ounce at 0938 GMT, while U.S. gold futures for December delivery were down $1.60 an ounce at $1,264.90.
A run of forecast-beating data, including jobs and services numbers on Thursday, has boosted speculation that U.S. interest rates could rise sooner rather than later, lifting both the dollar and the opportunity cost of holding non-yielding gold.
Analysts expect U.S. non-farm payrolls data due at 1230 GMT to show the pace of job creation picked up slightly in August, with a rise of 225,000 jobs.
"If we have stronger data this afternoon, we will have a dollar move starting, and then precious metals will be sold off," Georgette Boele, an analyst at ABN Amro, said.
"We (are forecasting) a better than consensus number for today - 6.1 on the employment rate and 250,000 on non-farm payrolls," she said. "What's also crucial now (is) the average hourly earnings...If that ticks up a bit, that will have a bigger impact."
European stocks were down 0.2 percent, pausing after the previous day's sharp rally spurred by an interest rate cut from the European Central Bank, which also launched new measures to support the euro zone economy.
That knocked the euro sharply lower on Thursday, lifting euro-denominated gold 1 percent, its biggest one-day move in a month. The euro steadied on Friday, while the dollar index was also little changed.
Looser monetary policy is nominally positive for gold, Swiss bank UBS said in a note on Friday, but any impact of the new measures in the euro zone is likely to be offset by gains in the dollar.
"It would have to take more aggressive action from the ECB, which is likely to come alongside a sharp deterioration in euro zone growth, for gold to benefit significantly," it said.
"In this scenario, concerns on weaker growth could potentially reactivate physical demand in Europe, should the fear-trade gain traction."
In the main physical gold markets, where demand has been soft in recent months, buying picked up slightly as prices declined. Premiums in China, the top buyer of gold, rose to about $4-$5 an ounce from $3 in the previous session.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund and a good measure of investor sentiment, said its holdings fell 4.78 tonnes to 785.73 tonnes on Thursday - the biggest one-day drop since April 16.
Among other precious metals, silver was up 0.5 percent at $19.10 an ounce, while spot platinum was flat at $1,404 an ounce and spot palladium was flat at $883.50 an ounce.