Gold ticks up in thin trade; deflation worry lingers

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Gold regained strength on Wednesday, although concerns European leaders would fail to come up with concrete measures to solve the region's debt crisis could prompt a flight to the safety of the U.S. dollar and dent bullion.

Inflation fears helped gold stretch its winning run to an 11th year in 2011, but markets are now worried that slowing global economic activity caused by the crisis could force jewellers, investors and speculators to curb spending.

"I guess some people are getting pessimistic about the outcome. You cannot really expect too much coming out of the summit," said Yuichi Ikemizu, branch manager for Standard Bank in Tokyo.

"We could see some more selling, maybe, but I think the $1,550 level should hold. I don't really expect it to go down to $1,500."

Gold rose $1.16 an ounce to $1,572.94 by 0316 GMT, having hit a low around $1,567 on Tuesday after German Chancellor Angela Merkel sought to bury once and for all the idea of common eurozone bonds to deal with the debt problems.

U.S. gold for August delivery fell $1 an ounce to $1,573.90. Trading volume was very thin at around 4,900 lots, versus around 100,000 lots at the close on Tuesday.

Gold hit a record of about $1,920 in 2011, when investors turned to the metal as a safe haven during the debt crisis in Europe.

But in 2012, declines in other markets have caused investors to sell gold for cash, sending prices to the lowest in more than four months at $1,527 in mid-May.

Asian shares rose on Wednesday but the euro was capped as hopes faded that this week's summit would deliver concrete measures to ease euro zone's sovereign debt crisis.

A firm dollar has also weighed on gold. The dollar index, which measures the strength of the greenback against a basket of currencies, is on track for a more than 4 per cent gain this quarter, while cash gold is set for a near 6 percent drop.

Overall trading was muted in the physical market as dealers turned their attention to the summit in Europe.

"The jewellery sector is quiet even though prices have come down. It doesn't help much," said a dealer in Hong Kong, who offered gold bars at premiums of $1 to the spot London prices.

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, and that of the largest silver-backed ETF, New York's iShares Silver Trust, remained unchanged on Tuesday from Monday.

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