Gold inches down, but euro zone worries cushion drop

By Rujun Shen

SINGAPORE (Reuters) - Gold inched down on Tuesday toward a key resistance level of $1,600 per ounce as safe-haven demand ebbed after Cyprus clinched a last-ditch rescue deal, but lingering concerns about the health of euro zone's banking system checked losses.

While Cyprus' deal with international lenders to shut down the country's second largest bank in return for 10 billion euros in rescue funds removed the immediate risk of a financial meltdown, investors were worried this could set a new precedent in restructuring the euro zone banking sector.

Gold, which typically benefits from economic uncertainty, pushed to a three-week high above $1,616 an ounce last week amid worries around the Cyprus bailout. It dropped to a 1-1/2 week low of $1,589.49 on Monday after Cyprus' 11th-hour deal.

"We saw a deal, which helped soothe some fear in the market," said Li Ning, an analyst at Shanghai CIFCO Futures. "But the price Cyprus paid for the deal makes investors worry about what will happen to other euro zone countries in trouble."

If the situation in the euro zone deteriorates, gold could get a boost, Li said.

Spot gold dipped 0.2 percent to $1,601.30 an ounce by 0327 GMT. U.S. gold fell 0.3 percent to $1,600.50.

Gold also came under pressure as the euro nursed heavy losses on fears future bank rescues in the euro zone would come with the same stern conditions seen in Cyprus' deal, helping lift the dollar index towards a 7-1/2 month peak.

"Dollar strength is probably going to stick around for the next couple of months," said a Singapore-based trader. A firmer dollar makes commodities priced in the greenback more expensive for holders of other currencies.

But with easy monetary policy from central banks stoking concerns of inflation and the implications of the Cyprus deal for the euro zone, the appeal for gold is expected to hold.

Russia increased its gold holdings for the fourth straight month in February, and a number of central banks in emerging economies also added gold to their official reserve, underscoring central banks' appetite for gold.

Holdings of SPDR Gold Trust, the world's biggest gold-backed exchange-traded gold, were unchanged at 1,221.26 tonnes from a day earlier.

Investors have been watching the appetite in gold ETFs as a barometer of interest in the metal. SPDR Gold Trust holdings dropped nearly 130 tonnes so far this year, more than wiping out the 96 tonne increase in 2012.

(Editing by Himani Sarkar)