Spot Gold Prices began London trade virtually unchanged on Tuesday, moving in a tight $3 range as Asian and European dealers awaited the return of US investors after their long Labor Day weekend.

The Nikkei stock index in Tokyo ended the day 0.6% lower. European stock markets dropped one-third of a per cent during the first hour of trade.

"Sentiment [in the Gold Market] remains firm following Friday's break through $670," says Brandon Lloyd for Mitsui in Sydney, "with attention focusing on today's US manufacturing release. If this prints below 50, the market will probably place the manufacturing sector into the same basket as the US housing sector!"

Wall Street analysts expect the US manufacturing index for Aug. – due for release at 14:00 GMT – to come in at 53, down from July's reading of 53.8. Any reading below 50 signals a contraction in the manufacturing sector.

"This [would] put further pressure on the US Dollar," says Lloyd, "and increase the chances of Gold Prices trading through the next resistance target at $676.50. The biggest risk to gold in the short term however, remains the potential Central Bank gold sales in the lead up to the end of the third year of the current five-year gold agreement on September 28."

First signed in 1999, the Central Bank Gold Agreement allows for the central banks of Western Europe to sell a total 500 tonnes of bullion between them each year. In the CBGA year to date, official data show, the CBGA members remain more than 100 tonnes short of this quota, despite record gold sales by the Banco d'Espana starting in Feb. The cash raised, many analysts believe, has been needed to help cover Spain's yawning 9% trade deficit.

"Central banks recent behavior directly in the gold market has also been a cause for some calm," notes Wolfgang Wrzesniok in the latest previous metals report from Heraeus, the German refining giant. "They have held back sales significantly [during the stock and money market turmoil of Aug.], and only a sale of about a tonne was announced last week."

On the other side of the trade, "this low sales volume in the past few days was more than met by physical demand from private investors and some stock-building by jewelers," Wrzesniok goes on. "Even the US-investments funds, till very recently regular sellers, were buyers who added slightly to their long positions."

By Tuesday's close in Tokyo, gold futures traded at the Tocom were little changed. Gold for delivery in Aug. '08 ended the day equal to nearly $686 per ounce, as the Japanese currency pushed down the Dollar by half-a-yen to ¥115.30, the bottom of its trading range over the last four sessions.

The European single currency dipped below ¥157.00 and slipped beneath $1.3600 for the first time since US president Bush and Fed chairman Bernanke assured the world on Friday that they will act "as needed" to prevent the collapse of subprime mortgage values spreading to the broader economy. (To find out what that might mean for gold, click here and read on...)

Germany's IKB bank yesterday said it will post a loss of perhaps €700 million ($953 million) as a result of its failed US mortgage-bond investments. Three predatory takeover bid may surface for Landesbank WestLB, another German bank hit by the US subprime collapse, according to The Times of London today. The weekly Wirtschaftswoche newspaper warns that the credit crunch now hitting German banks has barely begun.

"The damage on European banks may spread," reckons Ryohei Muramatsu at Commerzbank in Tokyo. "The European Central Bank is unlikely to hike rates amid the current situation. It's a negative for the Euro." (How did European banks end up as an Investment Landfill for toxic US mortgage debt? Get a full report here...)

The European Central Bank is forecast to remain on hold by 44 out of 55 economists interviewed by Bloomberg News, and this morning's resulting dip in the European currency helped take the Euro Price of Gold up to a new three-week high above €495.60 per ounce by 11:00 GMT.

Gold Priced in Sterling began the day in London little changed from Monday's start, itself a three-month high for the weekly opening, while in the forex market the British Pound dipped to $2.0150 as gilt prices were bid higher, pushing down yields in anticipation of a "no change" decision when the Bank of England also meets to set UK interest rates on Thursday.

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