(Updates prices, adds background)
* Gold hits highs last seen in March
* Weaker euro prevents break above $1,700/oz
* Gold, silver both overbought - RSI
* Silver puts on best performance vs gold in 4-1/2 months
* U.S. manufacturing sector shrinks for 3rd straight month
By Josephine Mason and Amanda Cooper
NEW YORK/LONDON, Sept 4 Gold prices were higher
for a third straight session on Tuesday as softer-than-expected
U.S. economic data kindled hopes that the Federal Reserve would
take new steps to stimulate the world's largest economy.
Bullion rallied to $1,698 per ounce, a level not seen in
almost six months, after data showed manufacturing slowed in
August. But the metal eased back after hitting technical
resistance as it approached $1,700 and as the euro slipped
against the dollar.
Spot gold was up 0.24 percent at $1,695.79 per ounce
at 4:26 p.m. EDT (2026 GMT).
U.S. gold futures for December delivery settled up
$8.4 at $1,696 per ounce, with volume just 10 percent below the
30- and 250-day average, preliminary Reuters data showed.
Activity had slowed last week ahead of the U.S. Labor Day
U.S. manufacturing shrank at its sharpest rate in more than
three years in August and U.S. construction spending fell in
July by the most in a year, according to two sets of data.
Both reports came hot on the heels of comments from Fed
Chairman Ben Bernanke last week that kept alive hopes for new
In a data-heavy week, investors were also awaiting August
U.S. employment data due on Friday for signs about the health of
"It's the avalanche of money argument," James Steel, analyst
at HSBC, said of the gains across the precious metals complex.
Some traders say there may be enough buying momentum for
bullion to re-challenge this year's high at $1,790.30 per ounce,
although technically the recent rally has pushed the market into
Gold's relative strength index (RSI) was at 73 on Tuesday,
its highest since early February. A level above 70 typically
indicates overbought territory.
Reinforcing the extent of investor appetite for gold,
speculative investors added to their net long positions the
latest CFTC report showed, and data showed hefty inflows into
exchange-traded funds in August, taking holdings to record
A new round of quantitative easing -- printing money to buy
government bonds to keep long-term interest rates low -- has
ignited fears of inflation further down the road. The first two
rounds of U.S. quantitative easing have doubled gold prices in
the last four years.
Aside from technical resistance, a weaker euro against the
dollar prevented gold's break above $1,700 as investor caution
mounted ahead of the ECB meeting on Thursday.
Policymakers are expected to announce a bond-buying plan to
help lower Spanish and Italian borrowing costs, but some traders
have questioned whether the bank will deliver on its pledge to
bail out debt-laden euro-zone countries.
In the meantime, the potential for disappointment on fiscal
action from either side of the Atlantic would also likely limit
gains in gold for now, analysts said.
"All that promise needs to turn into concrete action. And
for gold in the long run, it needs any sort of liquidity boost,
or balance sheet expansion, and for (bond) yields to stay low,"
Andrey Kryuchenkov, an analyst at VTB Capital, said.
In theory, gold benefits from low borrowing rates because
this cuts the so-called opportunity cost -- the premium
investors forfeit by owning gold rather than a yield- or
dividend-bearing asset -- of investing in this market.
Much of gold's performance until the end of the year will
depend on what steps the Fed takes. Its multitrillion-dollar
rounds of bond buying since late 2008 have already attracted
record investment in the metal.
In the U.S. government report on August employment, the
median forecast of economists polled by Reuters is for a gain of
120,000 jobs, down from 163,000 in July.
"Employment seems to be as important as growth, so the
numbers on Friday will most likely sway the Fed ahead of their
own meeting," Saxo Bank senior manager Ole Hansen said.
Some analysts say a number below 100,000 could provoke the
Fed to try to boost overall growth with another round of
monetary stimulus when it meets in mid-September.
The Fed meets next week to discuss monetary policy.
At the ECB meeting on Thursday, markets are positioned for
bank president Mario Draghi to add more detail to his pledge in
late July to do whatever it takes to preserve the euro.
Speculation about action was reinforced on Monday when
Draghi said central bank purchases of sovereign bonds of up to
three years maturity did not constitute state aid.
The ECB said at its last meeting that it would consider
buying the government bonds of the more indebted big economies,
such as Spain and Italy, to stem the spread of the debt crisis
and avoid another full-scale sovereign bailout, following those
of Greece, Ireland, Portugal and Cyprus.
The prospect of support for the euro from the ECB has helped
keep a pillar of support under the gold price, which tends to
weaken when other currencies fall against the U.S. dollar.
Gold priced in euros has touched fresh highs for
2012 this week at 1,346.91 euros an ounce, putting it less than
2 percent below last year's record high at 1,373.92 euros.
September is generally a month of strong performance for the
gold price. On average, over the last 44 years, gold has gained
2.1 percent in September, compared with March, historically the
weakest month based on percentage gains, where it has averaged a
loss of 0.5 percent.
The gold/silver ratio, which shows the number of ounces of
silver needed to buy one ounce of gold and acts as a gauge of
the relative performance of both metals, fell to its lowest
level since late April on Tuesday.
After gaining nearly 10 percent in the last two weeks,
compared with gold's 3.5-percent rally, the silver price
is overbought based on an RSI reading of 80.
Even so, the industrial metal eked out further gains on
Tuesday, rising 0.59 percent to $32.28 an ounce.
Highlighting how investor appetite for silver has taken off
in the last month, speculative holdings of U.S. silver futures
in August staged their largest monthly increase since September
2009, according to data from the Commodity Futures Trading
Commission last week.
"The silver price should receive additional buoyancy from
investment demand above all, both from ETF investors and money
managers. We see silver at $35 per troy ounce by year's end,"
The platinum group metals rose in line with a trend upward
in other industrial commodities such as crude oil and copper.
Platinum, which rose 8.6 percent last month after a
strike at the South African operations of world No. 3 producer
Lonmin turned deadly, was up 1.29 percent at $1,564.49.
Palladium was up 1.81 percent at $638.75.
(Editing by Alison Birrane, John Wallace and Bob Burgdorfer)