Spot gold prices recovered nearly all of Thursday's late sell-off during the first-half of London trade on Friday, climbing to $655 bid after holding around $652 throughout the Asian session.
In Tokyo, gold futures for April '08 had earlier closed the week 0.3% lighter at the equivalent of $657.42 per ounce.
The Yen weakened on the forex markets to a fresh four-and-a-half year low against the Dollar. But against the other major currencies, however, the US Dollar slipped back as rising Treasury bond prices pushed yields lower.
That move reduced the rate of return offered to cross-border investors by US debt, helping the Euro rise half-a-cent to $1.3436. The Pound Sterling hit a six-week high of $1.9968.
For non-US investors wanting to buy gold today, that put the gold price in Euros at €488 per ounce. The price of gold in British Pounds Sterling rose above £328 by lunchtime in London, unchanged from 24 hours earlier. The AM Fix in London had earlier come in at $652, some $1.40 above last Friday's Morning Fix in terms of the Dollar.
"Physical demand has been supporting the gold market at this level," notes today's report from Mitsui. "However, this is traditionally a quiet season for the largest consumer of physical gold – India – and if the technical pressure persists, this support may fall away."
Standard Bank's technical analysis also sees weakness ahead for the physical gold bullion market, saying that "further selling could be expected should gold break lower, with support levels targeted at $645 and subsequently critically at the 200-day moving average."
Inflationary risks eased in the broader markets, meantime, as US oil prices fell 18 cents to $68.40 per barrel just ahead of the Wall Street opening despite a threatened strike by oil workers in Nigeria, the world's fourth largest producer.
US stock futures pointed lower as European stocks slipped 0.2% intra-day. Shares in Barclays, one of London's leading banks, slipped nearly 1% after it sought to reassure shareholders about its exposure to Bear Stearns, the US bank now weighed down by more subprime mortgage debt than any other Wall Street firm.
Bear Stearns itself is reported to be preparing a $3.5 billion rescue package for its two ailing sub-prime hedge funds – the largest such rescue since Long-Term Capital Management was bailed out by the US Fed and Wall Street banks in 1998.
But fears of a major credit crunch have now swept into Frankfurt too, where the iTraxx Crossover index of junk-rated credit jumped to 216 basis-points above US Treasuries on Thursday before pulling back on Friday below the key 200-point mark.
"Rates drive the Dollar and the Dollar drives gold," says Mark Augustynak, a trader at Natixis Commodity Markets here in London. A spike in global interest rates as a result of a serious credit default would, therefore, reverse gold's traditional role as a "safe haven" when paper promises fail to pay.
"That is the near-term risk," agrees James Grant of the eponymous Interest Rate Observer writing in Forbes magazine earlier this week. "But I continue to believe in a sizable long-term reward. Yes, gold has had a nice seven-year run. But the monetary phase of the bull market has hardly begun."
As the central banks of Russia, China and Brazil have to print money to convert the $850 billion that the United States will pump into the financial system this year, says Grant, a long-term position in gold looks well advised.