* Dollar extends recovery as investors fret over scope of QE
* Fed's next steps closely eyed
* iShares silver ETF holdings rise to record high
(Updates prices, adds comment)
By Jan Harvey
LONDON, Oct 18 (Reuters) - Gold eased in Europe on Monday as
the dollar bounced back from its recent hefty losses, with
investors in the U.S. currency worried that expected U.S.
monetary easing had already been too heavily priced in.
Spot gold <XAU=> was bid at $1,365.95 an ounce at 1302 GMT,
against $1,370.50 late in New York on Friday. U.S. gold futures
for December delivery <GCZ0> fell $5.50 an ounce to $1,366.50.
Gold's rally to a series of record highs in recent weeks,
peaking at $1,387.10 an ounce, has been heavily predicated on
weakness in the dollar, with which the metal has traditionally
had a strong historic inverse correlation. It has struggled to
maintain traction as the dollar has recovered, however.
"At the moment, the monthly inverse correlation is about 95
percent, (so) the dollar still matters," VTB Capital analyst
Andrey Kryuchenkov said. "The failure to breach $1.40 for the
euro last week has certainly dented sentiment for dollar bears."
Investors had increased their bets against the dollar in
recent weeks amid expectations the Federal Reserve would unveil
a second round of quantitative easing as early as November.
Fed Chairman Ben Bernanke on Friday gave his most explicit
signal yet that the U.S. central bank would ease monetary policy
further, but did not provide details on how aggressively it
might act. []
Gold tends to benefit from losses in the dollar as these
lift the metal's appeal as an alternative asset and make
dollar-priced commodities cheaper for other currency holders.
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For a graphic of currency market tensions:
http://r.reuters.com/deh58p
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While the metal is correcting from its recent run higher,
analysts say it is set to remain firmly underpinned for as long
as further quantitative easing remains on the table -- though
the scope and shape of this remains unclear.
"The market focus has shifted from whether more QE will take
place to how much QE is in the offing," Standard Bank analyst
Walter de Wet said in a note.
"We believe that the gold market is pricing quantitative
easing of $500 billion (based on the gold price's strong casual
relationship with global liquidity and the Fed's balance
sheet)," he said. "A figure less than $500 billion could see the
gold price decline."
OVERSTRETCHED
From a technical perspective, the precious metal seems to
have become overstretched after rallying nearly 12 percent in
the six weeks to its mid-October record high, analysts said.
Its relative strength indicator was at or above 70 - a level
widely seen to indicate overbought conditions - in a nearly
unbroken run from Sept. 15 to Friday, Reuters data showed.
"Since gold broke out of its previous $1,265 high on Sept.
14, it has not experienced two consecutive negative daily
closes," said UBS analyst Edel Tully in a note. "Gold is overdue
a consolidation; it needs to adjust to $1300s price levels and a
short-term pullback would not be a bad thing."
"In the coming two weeks, until the FOMC meeting on Nov.
2-3, recent buyers will be nervous that they bought at the top
of the market and some profit taking from weak longs is likely,"
Tully added
Among other precious metals, silver <XAG=> was at $24.12 an
ounce against $24.26. Holdings of the world's largest
silver-backed exchange-traded fund, New York's iShares Silver
Trust <SLV>, rose to a record 10,224.05 tonnes on Friday.
The fund has seen inflows of more than 880 tonnes since
mid-September, worth some $679.3 million at today's prices.
Silver has outperformed gold in recent weeks with the number
of ounces of silver needed to buy an ounce of gold dropping to
its lowest in more than two years last week.
Elsewhere platinum <XPT=> was at $1,685.50 an ounce against
$1,687.60, while palladium <XPD=> was at $580 versus $584.80.
(Editing by Sue Thomas)
