Gold rebounds as dollar slips; still seen as vulnerable

By Eric Onstad

LONDON (Reuters) - Gold prices rebounded on Wednesday as the dollar resumed its downtrend, but analysts said bullion was vulnerable to weakness ahead of the Lunar New Year and if bulls start shedding their long positions.

Spot gold was up 0.5 percent at $1,344.75 an ounce by 1500 GMT. In the previous session it touched its lowest since Jan. 23 at $1,334.10.

U.S. gold futures for February delivery rose 0.6 percent to $1,342.80.

Gold received a boost as the dollar fell, putting the currency on track for its biggest monthly drop in nearly two years. The euro climbed against the dollar as firm euro zone inflation data for January kept expectations alive for a swift withdrawal of the central bank's stimulus policies.

A weaker dollar makes commodities priced in the greenback cheaper for buyers using other currencies.

Gold prices were heading for a third consecutive monthly gain, with the 3.3 percent climb so far in January making it the best month since August, largely on dollar weakness.

Wednesday's bounce, however, could be only a short-term respite from a downtrend that began after gold touched a 1-1/2 high of $1,366.07 last week.

"Seasonality is starting to fade ahead of the Chinese New Year, so you should not expect too strong physical demand at this point," said Joni Teves, precious metals analyst at UBS in London. "You also have long positioning building up quite significantly over the past six weeks, so that should put some pressure on the market."

Hedge funds and money managers raised their net long position in COMEX gold contracts to a four-month high, data showed on Friday.

Investors will also keep a keen eye on the U.S. Federal Reserve meeting later on Wednesday. The Fed is expected to leave interest rates unchanged while signalling a gradual tightening of monetary policy later this year.

"Yellen may deliver a hawkish surprise, setting the stage for a possible policy pivot ... Gold bears may take advantage of this move," said Stephen Innes, APAC trading head for OANDA.

Traders were also waiting for Friday's U.S. jobs report, which will include data on non-farm payrolls and average hourly earnings.

In other precious metals, silver climbed 0.7 percent to $17.25 an ounce after hitting a one-week low of $17.03.

Palladium shed 1.4 percent to $1,040.05, hitting a fresh five-week low after a 55 percent gain in 2017.

"Since mid-last year, speculative financial investors have been continuously betting heavily on rising palladium prices. Hence there has been and still is considerable correction potential," Commerzbank said in a note.

Platinum gained 0.7 percent to $1,002.60. It is up about 8 percent for the month, on track for its best month since January 2017. It hit a one-week low in the previous session.

(Additional reporting by Nithin Prasad and Nallur Sethuraman in Bengaluru; Editing by Alison Williams)