Gold on the Comex division of the New York Mercantile Exchange softened on Wednesday morning after Portugal carried out a bond auction.

Gold futures for February delivery were recently trading down $4.10 at $1,380.20 per ounce in New York, which is modestly up from the morning's low of $1,377.70.

The market is closely watching the ever-changing progression of Europe's sovereign-debt crisis. On Wednesday, Portugal sold 599 million euros ($778 million) of bonds due in 2020 at a yield of 6.716 percent. That compared favourably to the 6.806 percent secured at the previous auction on November 10.

Some precious metals bulls had speculated that Portugal would have to pay exorbitantly high interest rate or could have been locked out of the debt market altogether - a scenario that would have forced the country to take an emergency bailout package sooner rather than later. But since that proved not to be the case, the situation briefly feels less dire.

The completed Portuguese auction removed some safe-haven appetite from the market, which caused gold to drop to $1,377.70, a US-based gold trader said.

Nevertheless, the euro has since rallied against the dollar and has broken the psychologically important threshold of $1.30 to trade at $1.3033.

"There a lot of dollar watching going on right now. That's why we've seen gold move back above $1,380 from earlier lows," the trader said.

But Europe's lingering credit problems are still quite severe. There will be another test on Thursday when the Spanish go to the market for 2.5 billion euros of five-year notes and the Italians seek out 4-6 billion euros of four-year and 15-year notes.

Additionally, the spread to fund debt between Germany and the struggling southern European continues to grow. Just one year ago, the difference between financing German and Portuguese debt was a mere 50 basis points. That number today exceeds 400 basis points.

"That massive disparity casts a shadow over the long-term viability of the euro," the trader said.

Gold is also being supported by strong physical demand out of China as the Lion Fund Management, the first gold fund in China, has announced that it has reached its target of raising $500 million, which will be invested in foreign gold-backed ETFs.


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