Gold price steadies below 3-week high in London as funds reallocate positions

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US Dollar rebounds, European equities edge higher (Reuters) US Dollar rebounds, European equities edge higher (Reuters)
SummaryGold attempts to extend rally to sixth day

Gold prices steadied below a three-week high on Tuesday, attempting to extend gains to a sixth straight session, as funds rebalance weightings of gold at the start of the year, but gains were limited by a slightly higher dollar and firmer stock markets.

Spot gold has gained 3 percent over the past six sessions, mostly due to a fall in equities after record 2013 gains.

The metal's strength followed a 28 percent drop last year, its largest in more than three decades, as the U.S. Federal Reserve announced plans to unwind ultra-loose monetary policy.

Analysts said that as the macroeconomic backdrop brightens, prices still look vulnerable to further losses, with the U.S. stimulus tapering starting in January, the possibility of a stronger dollar and low inflation likely to continue to deter investor interest.

In the short term, analysts said prices may gain some support from funds buying gold to rebalance their portfolios, after last year's price drop reduced the metal's value relative to other assets.

"The index rebalancing may keep having an impact in the next few sessions but by mid-January that impact should be gone," BofA Merrill Lynch analyst Michael Widmer said.

"I think the labour market report in the U.S. is going to be important, but overall nothing has really changed in the gold market and people are still wondering why one would want to hold the asset."

Spot gold was up 0.1 percent at $1,239.10 an ounce by 1057 GMT, not far from its three-week peak of $1,248.30 hit in the previous session.

U.S. gold futures for February delivery were unchanged at $1,238.40 an ounce, after unusually sharp movements in the previous session, when prices fell 3 percent for a brief period before recovering.

European shares steadied on Tuesday after fresh falls in Asia left stocks there at a near-four month low and disappointing U.S. data had weighed on Wall Street.

The dollar rebounded 0.1 percent against a basket of currencies after overnight weakness due to disappointing U.S. services sector data that raised concerns about the country's economic growth.

Traders will now focus on U.S. nonfarm payrolls and trade numbers on Friday, which will be preceded by Wednesday's

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