Gold prices hover above $1,600, recovery hopes offset bargain buys

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SummaryGold may continue its recent trading pattern in which prices rise initially with support from buyers.

Gold struggled to pull significantly above $1,600 an ounce on Wednesday, as ebbing interest in the safe-haven metal amid signs of an improving global economic outlook offset purchases by bargain hunters in Asia.

Gold may continue its recent trading pattern in which prices rise initially with support from buyers in China and other Asian countries, and drop after Asian trading hours end, traders said.

The most-active Shanghai gold futures contract and two spot gold contracts on the Shanghai Gold Exchange dropped to their lowest levels in nearly seven months, tracking losses in the global market, but the lower prices have attracted strong buying interest.

"We have seen quite strong interest in domestic market as prices weaken, although such demand is unable to push prices much higher," a Beijing-based trader said.

"Once prices stabilise around this level, we may see demand dwindle. But another sharp retreat or rally in prices will trigger a lot of investment and physical gold demand."

Spot gold inched up 0.2 percent to $1,607.86 an ounce by 0254 GMT. It dropped to just above $1,600 on Tuesday, close to a six-month low of $1,598.04 hit last week.

U.S. gold also rose 0.2 percent, to $1,607.60.

Technical analysis suggested spot gold is expected to test a support at $1,599 an ounce, a break below which will lead to a further fall towards $1,582, said Reuters market analyst Wang Tao.

The formation of a "death cross" on the spot gold chart, with its 50-day moving average dropping below its 200-day moving average, also suggests a pullback could be on the way. However, a Relative Strength Index below 30 since late last week indicates the market has been oversold.

Confidence in economic recovery sent the S&P 500 index and Dow Jones industrial average to their highest in more than five years. S&P 500 has climbed more than 7 percent so far this year, compared with a 4-percent loss in cash gold.

The latest piece of good news on global economy was that German business sentiment soared to its highest level in nearly three years this month, enhancing optimism that the worst of the euro zone debt crisis is over.

"The inverse correlation between gold and equities has become very pronounced, as investors gravitate towards high-yielding and riskier assets," said Li Ning, an analyst at Shanghai CIFCO Futures.

Investors will be focusing on the wording in the minutes of the US Federal Reserve's latest policy meeting due later in the day to gauge

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