Picture: REUTERS
Picture: REUTERS

LONDON — Gold closed in on a two-month high hit earlier on Friday, leaving prices on course for their biggest weekly gain in a month, as weaker than forecast US data took some steam out of expectations for early Federal Reserve stimulus reduction.

US housing starts increased 5.9% to a seasonally adjusted annual rate of 896,000 units. Economists polled by Reuters had expected ground-breaking to rise to a 900,000-unit rate in July.

Spot gold firmed 0.1% to $1,366.91 an ounce by 1.10pm GMT, having earlier hit a two-month high of $1,372.51. It has risen about 3.5% so far this week, having gained for the last six sessions out of eight.

US gold futures for December rose 0.3% to $1,364.90/oz.

"Investors are so concentrated on the whole talk about tapering that any disappointing US data can bolster prices," Saxo Bank GM Ole Hansen said.

"People are pricing in the fact that the Fed will keep interest rates low for quite a long time and that’s positive for gold."

A low interest rate environment encourages investors to put money into the noninterest-bearing assets such as gold.

The dollar pared some earlier gains after the data and US Treasury yields slipped from two-year highs of 2.8% hit on Thursday.

An early end to the Fed’s quantitative easing programme could hurt assets such as gold that had been boosted by central bank liquidity.

The Fed’s next policy meeting is on September 17-18, while the July Federal Open Market Committee minutes will be released next Wednesday.

Traders said that the crossing of a technical resistance level at $1,350 was also adding to buying, although the move upwards seen in the past week looked to have lost some momentum.

"After gold broke through its resistance at $1,350 last night things are looking somewhat more encouraging," Heraeus trader Alexander Zumpfe said.

"Expect initial resistance around the 100-day moving average at $1,375, which is slightly above today’s intraday high."

Holdings of SPDR Gold Trust, the world’s largest gold-backed ETF, fell just 0.3 metric tonnes to 912.92 tonnes on Thursday. Rare inflows were seen in the fund twice over the past six sessions but holdings remain at four-year lows.

China physical buying

Shanghai gold futures rose 2% on Friday, with premiums to London spot prices up about $3 overnight to $24, indicating strong demand ahead of the fourth quarter.

Analysts also expect demand to start returning in India in coming weeks, ahead of the winter wedding season and festival celebrations and despite government’s imports restrictions.

Silver rose to its highest in almost three months at $23.15/oz, before trading down 0.2% to $22.92. The metal was heading for its best week since late October 2011, with gains of about 11%.

Platinum was unchanged at $1,522.99/oz and palladium dropped 0.4% to $756.47/oz.