Gold edges lower as Chinese support fades ahead of holiday

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold failed to hold overnight gains on Thursday as support from major buyer China faded ahead of the Lunar New Year holiday, offsetting safe-haven bids as equities weakened and after another cut in U.S. stimulus.

Markets in China - the world's biggest buyer of gold - are closed from Friday for a week, but trading had already quietened on Thursday.

Bullion purchases from the mainland were strong in the run up to the holiday as gold is often bought for good fortune.

Subdued demand from China, usually the biggest support for prices during Asian hours, took the sheen off the metal's safe-haven appeal, even as investors shied away from emerging markets and equities. Other safe-havens such as the yen gained.

"The strong buying interest from China seen in the first weeks of January looks set to abate after the New Year festivities," said Eugen Weinberg, head of commodity research at Commerzbank, adding that prices could come under more pressure in the near term.

Traders have said that gold would not be able to sustain any rallies with China out of action.

Spot gold had fallen 0.5 percent to $1,261.81 an ounce by 0308 GMT, after gaining nearly 1 percent on Wednesday. Silver declined 1.2 percent, tracking gold.

Premiums for 99.99 percent purity gold on the Shanghai Gold Exchange fell below $4 an ounce on very thin volumes, from $5.50 an ounce on Wednesday. They were as high as $20 earlier this month.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, saw a rare inflow of fresh investment on Wednesday with holdings increasing by 2.10 tonnes to 792.56 tonnes. But holdings are still near a five-year low.

"The gold price should only start a sustained upwards movement around the middle of this year. A sustained price rally would require an end to the ETF outflows, which we expect to occur in the second half of this year," said Commerzbank's Weinberg.

STIMULUS CUT

The Fed on Wednesday said it would trim its monthly bond purchases by another $10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets. It announced an earlier $10 billion cut in December.

Gold dropped 28 percent last year on an improving economy, and in anticipation of the stimulus cut.

"While the implications behind less loose monetary policy or policy tightening is theoretically negative for gold, this may have largely been priced into the bullion markets," HSBC analysts said in a note.

In the near-term, gold prices are likely to be more volatile with the Lunar New Year on January 31, they said.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford)