Gold Prices rallied to $1795 per ounce Tuesday morning in London – still 0.9% down for the week – while stocks and commodities also rose despite yesterday's news of an Italian debt downgrade.
A day earlier, US stock markets fell, while Gold Prices dropped 2% in less than hour.
"With market confidence in equities undermined...it was surprising that gold found so little support [on Monday]," says one London bullion dealer.
"The technical picture is bearish," note technical analysts from bullion bank Scotia Mocatta, adding that there is risk of "a deeper correction" towards $1704.
Silver Prices meantime hit a low of $39.24 per ounce – their lowest level in nearly four weeks.
Ratings agency Standard & Poor's lowered its credit rating on Italian government debt on Monday – knocking it down one notch from A+ to A.
"The downgrade reflects our view of Italy's weakening economic growth prospects," said a statement from S&P.
The ratings agency also cited "Italy's fragile governing coalition and policy differences within parliament" as factors.
Italy's downgrade is "a reminder that we've had the market in control," reckons Adrian Foster, Hong Kong-based head of financial market research Asia at Rabobank.
"Policymakers across the Eurozone have been well and truly asleep at the wheel."
Italy's parliament last week approved €54 billion of austerity measures. Moody's, another ratings agency, says Rome's austerity package – which includes cuts to local government budgets – is "credit negative", meaning Moody's is more rather than less likely to follow S&P and cut Italy's rating.
Italy's public sector debt, at around €1.9 trillion, is 120% of the country's annual gross domestic product.
The costs of buying credit default swaps – a form of bond insurance – for Italy and Germany hit record highs on Tuesday morning, news agency Bloomberg reports.
"People wonder if there are going to be more bailouts and support, and what does this actually mean for the underlying credit quality of Germany," explains Anke Richter, London-based credit strategist at Mizuho International.
Elsewhere in Europe, Greece "will have to do more" to cut its deficit, according to a senior European official quoted by the Financial Times on Tuesday.
Representatives of the so-called troika of lenders – the European Central Bank, European Union and International Monetary Fund – are due to continue discussions with the authorities in Athens on Tuesday, with a view to deciding whether or not it should receive its next bailout installment – worth around €8 billion.
Unless it receives the next slice of funding, the Greek government estimates it will run out of money in three weeks.
The IMF reportedly wants Greece to step up efforts to prevent tax evasion, rather than simply raise taxes. It also wants Greece's Socialist government to dramatically cut the size of the public sector.
On the currency markets, the Euro is down nearly 4% since the start of the month. Over the same period, Euro Gold Prices are up 3%, to around €42,100 per kilo (€1310 per ounce).
"There is scope for gold to rally as Europe's problems cannot be settled overnight," says Zhang Qian, analyst at China's largest brokerage Haitong Futures.
"As for the US, there still aren't clear signs that the economy there is healthy."
The Federal Open Market Committee begins its two-day meeting in Washington later today to decide US monetary policy.
"One major threat to gold remains the announcement, or at least the suggestion, of further stimulus by the Fed," says a note from Swiss refiner MKS.
"It is believed that the US stimulus program will be boosted by buying longer-dated US government debt. This in turn may be dangerous for Gold Prices potentially putting downward pressure on the prices."
Gold output in China meantime fell 7.1% in July compared to the previous month to 30.083 tonnes, according to official figures published by China's Ministry of Industry and Information Technology on Tuesday.
Gold Mining production dropped to around 25.9 tonnes – a near 7.2% fall for the month. Smelting production meantime fell below 4.2 tonnes – a near 6.9% monthly drop.
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