Gold Prices Slide on European Concerns

Gold dropped on Tuesday as the dollar strengthened versus the euro on renewed fears of credit downgrades in major European economies and uncertainty over Greece's bailout.

Bullion fell with the euro after Moody's warned it may cut its triple-A credit ratings of France, Britain and Austria. The ratings agency cited the euro zone debt crisis.

Gold has slipped in February after rising 11 percent in January, when it was boosted by the Federal Reserve's nero-zero interest rate outlook for nearly three more years. Analysts expect the precious metal to trade in a range for the foreseeable future.

"Any rallies will be capped against the overall potential of an economic slowdown, absent truly new actions by the European governments," Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.

"I'm not surprised to see gold working in a trading range in next couple of weeks," he said.

Spot gold was down 0.2 percent at $1,719.36 an ounce by 11:06 a.m. EST, having touched an intraday low of $1,711.70 earlier in the day.

U.S. gold futures for April delivery were down $3.40 at $1,721.50.

While the Moody's news rattled the markets, focus remained on Greece, which has acknowledged it still has much to do to persuade the European Union and International Monetary Fund to save it from a chaotic default.

Euro zone finance ministers have asked the Greek government for details of how it will fill a massive gap in its plan for extra savings this year ahead of a key meeting on Wednesday.

Gold remains more sensitive to moves in the euro in the short term than to rising risk aversion. The euro zone debt crisis has been a positive driver of prices last year.

Technical selling weighed on gold again when it failed to rise above Monday's high around $1,730 an ounce. Last week, gold encountered heavy technical selling around $1,750 an ounce, the highs set in early December.

"Gold had a good run-up but it's banged its head against resistance around $1,760.00," Saxo Bank senior manager Ole Hansen said.

On the physical side of the market, gold demand in major consumer India was soft on Tuesday as traders bet prices would continue to fall, after briefly ticking higher.

India Inflation Drops to 26-Month Lows

Helped by a drop in food prices and a stronger rupee, the rate of inflation in India recently fell to a 26-month low, fueling hopes that the central bank will soon cut interest rates.

The government on Tuesday said India's wholesale price index was up 6.55% in January from the year-earlier month, down from 7.47% in December and a revised 9.5% in November. It's also the lowest inflation rate in 26 months in India.

The drop was led by primary food articles, mainly potato and onion prices, which had surged in the same period last year.

But to the surprise of some economists, core inflation also eased to 6.6% year-on-year in January, from 7.5% in December, with the drop there led by textiles, wood and paper products.

The Reserve Bank of India, which hiked interest rates 13 times between March 2010 and December 2011 to curb high inflation, late last year signaled that monetary policy would shift towards supporting growth. India's economy decelerated last year due to the impact of higher rates, slow growth in the U.S., and financial turmoil from the crisis in Europe.

At its last meeting in January, the RBI took a first step towards easing monetary conditions by lowering the level of cash reserves it requires banks keep.

Recently, India's government forecast growth of 6.9% for the current fiscal year ending in March, compared with 8.4% in the previous year.

"Today's lower core inflation print, coupled with the deceleration in growth supports our view of the RBI easing [its key interest rate] by a minimum of 100 basis point in 2012," said Rohini Malkani, an economist at Citibank.

However, economists and analysts here believe the central bank will wait until April to start cutting interest rates, only after the government announces its budget for the coming fiscal year, due out in mid-March.

Core inflation at 6.6% is still above the RBI's "comfort zone" of 4% to 5%, while government subsidies to keep fuel prices lower for India's mostly poor population have kept some pent up inflation pressures.

Also key will be commodities prices and the rupee. After a slide in the second half of last year, a more than 7% appreciation in the in January also played a role in bringing down inflation for India's economy, which is heavily dependent on imports of oil and other commodities.

Oil Rises to Three-Week High

Oil advanced to the highest level in three weeks as German investor confidence surged and sales at U.S. retailers climbed in January.

Oil gained for a second day after the ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to 5.4 in February from minus 21.6 in the previous month. U.S. retail sales increased 0.4 percent, the Commerce Department reported today.

"The economic sentiment is turning more bullish in Europe and that's supportive for the oil market," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "The U.S. economy is on the pace to show somewhat between moderate and strong growth."

Oil for March delivery gained 61 cents, or 0.6 percent, to $101.52 a barrel at 9:16 a.m. on the New York Mercantile Exchange . The price reached $101.68, the highest since Jan. 19. Prices are 2.7 percent higher this year.

Brent oil for March settlement fell 11 cents to $117.82 a barrel on the ICE Futures Europe exchange.

The German confidence index is the highest since April 2011 and the growth is the third straight increase. Economists forecast a gain to minus 11.8, according to the median of 40 estimates in a Bloomberg News survey.

"There's greater optimism that the worst of the Greek situation is over and signs that the economy is getting better," said Fred Rigolini, vice president of Paramount Options Inc. in New York. "Getting above $100 is important and adding to the bullish momentum in the market."

Inventories grew by 1.6 million barrels, or 0.5 percent, to 340.8 million in the week ended Feb. 10, according to the median estimate of 10 analysts surveyed by Bloomberg News. It would be the highest level since Sept. 23 and the fourth weekly gain, the longest string of increases since April. Eight respondents forecast a gain and two a drop.

Retail Sales Up Modestly as Recovery Advances

Retail sales rose less than expected in January, hurt by discounting in the auto sector, but a rebound in an underlying measure of sales suggested a solid underpinning for the economy's recovery.

Total retail sales increased 0.4 percent last month, the Commerce Department said on Tuesday, below economists' expectations of a 0.7 percent increase.

Sales excluding autos, gasoline and building materials rebounded 0.7 percent after falling 0.4 percent the prior month.

"I don't think there's anything here that really brings into question the fact that the economy has been improving," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

U.S. stocks opened weaker on the date, while Treasury debt prices rose. The dollar rose against a basket of currencies.

Fears of a sharp slowdown in the U.S. economy have faded in recent weeks on signs that the job market is picking up and manufacturing is accelerating.

Another report on Tuesday showed confidence among small U.S. business owners hit a four year-high in January, according to the National Federation of Independent Business.

With the economy strengthening, there is a good chance the Federal Reserve will raise interest rates before the end of 2014, according to a Reuters poll of economists. The Fed has said it expects to hold rates low through the end of that year.

Still, with the unemployment rate at 8.3 percent in January, a significant minority still expect a further easing of monetary policy in coming months.

In the retail sales report, spending at gasoline stations rose 1.4 percent - the biggest gain since March 2011 - while receipts for electronics increased 0.5 percent.

Dampening the overall increase, sales of cars and autoparts dropped 1.1 percent, while purchases at non-store retailers, a category dominated by online sales, also fell 1.1 percent.

The decline in auto receipts was surprising given that motor vehicle sales in January were the highest in nearly two-and-a-half years.

But the increase in core sales, which correspond most closely with the consumer spending component of the government's gross domestic product report, suggested consumers were not growing more timid.

"The headline number was a little weaker than expected but the core figure was better so net-net it was not entirely a negative report," said Boris Schlossberg, director of currency research at GFT in Jersey City, New Jersey.

The government revised downward its estimates of retail sales in both December and November, suggesting consumers did not spend as much as previously thought during the holiday shopping season.

In another report, the Commerce Department said business inventories rose 0.4 percent to $1.56 trillion in December. Economists polled by Reuters had forecast inventories increasing 0.5 percent in December.

The economy still faces threats from a potential worsening of Europe's debt crisis or the possibility or fiscal tightening at home, although comments by Republican lawmakers on Monday suggested a deal was within reach to extend a payroll tax cut.