LONDON: Gold prices dipped on Monday, after posting their sharpest weekly rise in more than a month, in cautious trading ahead of a meeting of European Union leaders to come up with a firm plan to tackle the euro zone debt crisis. The two-year-old debt crisis has not only pushed a few euro zone nations to the brink of bankruptcy, but also threatened to split the single currency bloc and shake the global economy. French President Nicholas Sarkozy and German Chancellor Angela Merkel will meet to align their positions on closer fiscal integration of the region, before a European Central Bank meeting and a European Union summit later in the week. "I think politicians across the board recognize there is a huge issue here that needs sorting out. Whether Europe can deliver is still an open question," said Natixis analyst Nic Brown. "There is likely to be a fair amount of volatility on the political front this week." Spot gold slipped 0.4 percent to $1,739.29 an ounce by 1212 GMT, after rising nearly 4 percent in the previous week. US gold fell 0.4 percent to $1,744. World stocks rose and troubled euro zone bonds recovered as confidence grew that European leaders would make big strides in solving the euro zone's debt crisis at a crucial summit this week. "Should sentiment improve further in the market it wouldn't be surprising if gold falls again, but it may also come under pressure if the rest of commodity sector comes under pressure," Commerzbank analyst Eugen Weinberg said. "It's not performing as expected at the moment, but there is no reason to be worried yet. It's not surprising after the last couple of weeks to see some profit taking." Gold has diverged somewhat from its traditional status as a safe haven from political and economic volatility in recent weeks, and has tended to move more in line with other commodities, like base metals. Benchmark three-month copper on the London Metal Exchange was down 0.4 percent at around $7,855 per ton. "There is still a lot of risk in Europe, and gold prices are no longer reacting to it they way they used to," Brown said. "Commodities across the board are trading as an asset class and therefore inversely related to the strength of the dollar." The dollar fell against a basket of currencies on Monday, as the euro rose on hopes for a positive outcome from the Dec. 9 EU summit. A weaker dollar makes commodities priced in the currency cheaper for holders of other currencies. "Market hopes of progress on Europe should support gold prices for the next few days ahead of an expected ECB rate cut on Thursday," ANZ said in a note. The European Central Bank (ECB) is expected to cut its main interest rate for the second month running, a move that would take it back to a record low of 1.0 percent or lower if the bank decides a 50 basis point cut is needed. China also seems to be in need of monetary policy support. After publishing data showing its vast manufacturing sector shrank in November, an HSBC purchasing managers' index showed the world's second-largest economy slowing quickly. Monetary policy easing raises the inflation outlook and benefits gold, seen as a good inflation hedge. Fundamentals On the fundamental side, the news flow remained supportive for gold. After last week's coordinated central bank intervention, physically backed exchange-traded funds registered new inflows again, Credit Suisse said in a note. The official sector also continued to buy. South Korea's central bank said on Friday it bought gold in November for the second time this year to diversify its foreign reserves, joining its counterparts in other countries in seeking protection against financial instability and inflation. Palladium outperformed the precious metals complex, rising 0.5 percent to $645.22, lifted by data last week showing US auto sales rose 14 percent in November, the fastest rate in almost two years. Palladium is used in auto catalysts. Platinum dipped 0.5 percent to $1,539.99 and silver rose 0.03 percent to $32.57.
