Precious-Gold dips after Libya peace plan, record in sight

Thu Mar 3, 2011 9:40am GMT

* Libya mulls Venezuelan peace proposal
* Gold rally pauses within sight of record highs
* Coming up: ECB rate decision; 1245 GMT
(Updates comment, details, prices; prvs SINGAPORE)
By Amanda Cooper

LONDON, March 3 (Reuters) - Gold eased on Thursday after the Arab League said aVenezuelan proposal to end the Libyan conflict was under consideration, but entrenched uncertainty over the future of the region kept prices within sight of record highs.

Arab League Secretary General Amr Moussa told Reuters on Thursday that the a plan to bring peace to proposed by Venezuelan leader Hugo Chavez was "under consideration."

While this has eroded some of the safe-haven demand that has shot gold and the Swiss franc to all-time highs this week, financial markets are on edge, as reflected by volatility indices such as the VIX hovering near 3-1/2 month highs.

Spot gold XAU=, which has risen by 10 percent in the six weeks since the unrest in Tunisia and Egypt spilled into Libya, Yemen, Bahrain and, most recently, Oman and Iran, hit a record
$1,440.10 an ounce on Wdnesday.

The gold price was last down 0.2 percent at $1,432.30 an ounce at 0928 GMT, while U.S. April gold futures GCv1 were down 0.4 percent at $1,431.40. Analysts said after having rallied in four of the past five sessions, a modest decline did not signify the recent rally was over.

"That's to be expected anyway, with gold having done quite a lot over the last couple of weeks and set a new high. I don't think it should be a surprise to see some consolidation at the very least," said Credit Suisse analyst Tom Kendall.

"The Middle East has certainly been a big factor for gold over the last few weeks," Kendall said. "If the situation deteriorates, say in some of Libya's neighbours or if we saw more widespread protests in places like Bahrain or Saudi Arabia, then for sure you'd see another reaction in the energy markets and in gold."

PEACE IN LIBYA?

News network Al Jazeera said earlier the plan involved a commission from Latin America, Europe and the Middle East trying to reach a negotiated outcome between Libyan leader Muammar Gaddafi and rebel forces for this North African oil-producing country.

"If some sort of resolution is achieved for Libya, it will certainly affect gold -- investors will take profit and adjust their long positions," said Ong Yi Ling, an analyst at Phillip Futures.

Brent crude LCOc1 dropped more than $3 on the news to an intra-day low of $113.09 a barrel, before recovering to near $115 by 0700 GMT, while European equities pared some of the
previous day's declines and the euro EUR= hovered near
four-month highs ahead of a European Central Bank rate meeting.

Investors are braced for what could be one of the most important ECB meetings this year, in which the bank is expected to step up its anti-inflation rhetoric and may phase out some of
its crisis support measures.

Most economists do not expect rate hikes to materialise until at least October.

But at the very least there is a high chance the ECB will restrict the amount of funds available at its three-month liquidity tenders as it withdraws the emergency lifelines put in place during the depths of the financial crisis.

Rising interest rates can undercut gold's appeal among investors as it bears no yield of its own. But the subsequent boost such an indication from the ECB could give the euro against the dollar could prove supportive.

"Clearly there is a growing appreciation that the ECB is likely to move faster than expected on rates and, at the same time, the Fed is still very much on hold," said Credit Suisse's Kendall. "So from a rates and a foreign-exchange perspective over the medium term, certainly you would think this would be positive for gold."

China, which has raised interest rates twice in the past six months and increased bank reserve requirement ratios eight times since the start of 2010, will probably raise them again this
month, as the world's second-largest economy battles stubborn inflation.

Silver XAG= was largely unchanged on the day at $34.72, just shy of Wednesday's 31-year high at $34.96 an ounce. Platinum XPT= eased 0.3 percent to $1,840.24 an ounce, while palladium XPD= was up 0.1 percent at $817.28. (Additional reporting by Rujun Shen in Singapore; Editing by William Hardy, Thomson Reuters)