Gold steadies near $1,200 as oil firms; sentiment remains bearish

Gold steadied near $1,200 an ounce on Wednesday as a rise in oil prices provided support, but strength in the dollar and optimism about the US economy weighed on the metal's appeal as a hedge.

Bullion also got some help from inflows of 2.4 tonnes into SPDR Gold Trust, the world's top gold-backed exchange-traded fund.

Despite the first inflow in two weeks, the fund's holdings are sitting firmly near a six-year low, underlining bearish sentiment in the market.

Spot gold was little changed at $1,199.44 an ounce at 0346 GMT after falling 1 per cent in the previous session.

"Precious metal prices have been out of favour since July. For starters, the US dollar has rallied. Moreover, inflation expectations have fallen substantially because of a sell-off in oil prices," ABN Amro analyst Georgette Boele said in a note.

Bullion has fallen in tandem with oil in recent sessions on expectations that weaker crude prices could reduce inflationary pressure. The metal is usually seen as a hedge against rising prices.

Oil rebounded more than 1 per cent on Wednesday but Brent and US crude have fallen more than 30 per cent since June and touched five-year lows earlier in the week on supply worries.

Despite some gains in the first half of the year from geopolitical tensions, gold has fallen in recent months as strong US economic data and expectations of interest rate hikes have boosted the dollar.

The greenback hit a seven-year high versus the yen on Wednesday and continued to hold firm against a basket of major currencies, thanks in part to a big rise in US yields as the economic outlook there outshone most of its rich world peers.

Upbeat comments from two influential Federal Reserve officials stressing the positive impact on the US economy of the drop in oil prices contributed to the greenback's strength.

Investors believe demand for gold will fall if rates rise as it is a non-interest-bearing asset.

"We expect the gold price to remain under pressure initially in the first half of next year on the back of growing speculation about increasingly imminent interest rate hikes in the United States," Commerzbank said in a note.

It sees gold falling to $1,125 on average in the second quarter of 2015 but expects it to climb to $1,250 by the end of the year as the pressure abates.

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