Gold drifts lower as Spain worries weigh on euro

SINGAPORE, Oct 1 (Reuters) - Gold drifted lower on Monday
after posting its biggest quarterly rise in more than two years,
tracking a weaker euro as Spain's struggle to control its
finances worried investors.
    Caution has returned to the market after central banks'
stimulus measures cheered gold bugs and sent bullion up for four
straight months. Investors are now seeking fresh catalysts amid
the still-grim picture in the euro zone.
    Spain's debt levels are set to rise next year, piling
pressure on the government to apply for aid as it pours funds
into cash-strapped regions, an ailing banking system and rising
refinancing costs, its budget showed on Saturday. 

    The euro fell to its lowest in nearly three weeks on
uncertainty over Spain's bailout plan, while the dollar index
 climbed to its highest since mid-September, making
dollar-priced gold less attractive to buyers holding other
currencies. 
    "In the short term, the weaker euro/dollar does have an
impact on gold prices," said Dominic Schnider, an analyst at UBS
Wealth Management in Singapore.
    "While structural change in Europe will take years, the
short-term solution to the debt crisis is money-printing, which
will support gold."
    Dollar-priced gold closed last week barely changed, despite
a 0.8-percent rise in the dollar index, showing bullion's
resilience, he said.
    Euro-priced gold hit a record high of 1,381.15
euros an ounce last Friday.
    Spot gold had inched down 0.3 percent to $1,766.10 an
ounce by 0658 GMT, after finishing the last quarter up nearly 11
percent, its biggest quarterly rise since the second quarter of
2010.
    U.S. gold fell 0.3 percent to $1,768.50.
    China's economy offered more evidence of a seventh straight
quarter of slowing growth on Monday, with an official survey of
factory managers remaining in contractionary territory for a
second successive month.       
    That weighed on risk appetite, but also further fuelled
expectations of more stimulus measures in the nation, which
rivals India as the world's top consumer of gold.
    A few key markets in the region, including China and Hong
Kong, are shut for public holidays. China will remain closed for
the rest of the week.

    Oil and base metals also weakened as growth worries took
centre stage, while investors await a further round of
purchasing managers index data from the euro zone nations and
United States to better gauge the global economy.
 "China's slowdown is the prevailing theme out there and of
course Europe is always an overhang, but there are only brief
spurts of volatility then interest wanes again," said a Hong
Kong-based trader. 
    Asia's physical gold buyers mostly remained on the
sidelines, with one Singapore-based dealer saying that the gold
bar premium in Singapore was little changed at 50 cents.
    Singapore scrapped a 7-percent sales tax on investment gold
from Monday, as part of a push to establish the city-state as a
gold trading hub.    
    Hedge funds and money managers raised their gold future
positions to their most bullish in almost seven months in the
week ended Sept. 25, as investors expecting continued monetary
stimulus from major central banks sought a hedge against
inflation. 
    Holdings of gold-backed exchange-traded funds posted a small
gain to 73.98 million ounces by Sept. 29, towards a historical
high of 74.288 million ounces hit last week. 

 Precious metals prices 0658 GMT
  Metal             Last    Change  Pct chg  YTD pct chg    Volume
  Spot Gold        1766.10   -4.59   -0.26     12.94
  Spot Silver        34.30   -0.16   -0.46     23.87
  Spot Platinum    1647.25  -12.70   -0.77     18.25
  Spot Palladium    626.47   -6.83   -1.08     -3.99
  COMEX GOLD DEC2  1768.50   -5.40   -0.30     12.87        15062
  COMEX SILVER DEC2  34.37   -0.21   -0.61     23.11         3572
  Euro/Dollar       1.2839
  Dollar/Yen         77.82
  COMEX gold and silver contracts show the most active months
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