Gold remains below closely watched $1,700 mark

LOS ANGELES (MarketWatch) � Gold futures edged higher Monday, coming off weaker levels following a downbeat report about manufacturing activity in the New York region, but the precious metal remained below the $1,700-an-ounce mark.

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Gold for February delivery GCG3 �rose $1.20, or 0.1%, to $1,698.20 an ounce.

Gold traded as low as $1,687.50 to begin the week before recovering, according to FactSet data. Prices sloughed off weaker levels after a survey compiled by the Federal Reserve Bank of New York showed a surprise: Regional manufacturers said business worsened earlier this month.

After the survey, �we did see a bit of short-covering come into the gold market ... normally how [investors] would react to a bearish economic report,� said Darin Newsom, senior analyst at Telvent DTN, in a telephone interview.

The Empire State index fell to negative 8.1, a drop from the negative 5.2 logged in November. Economists surveyed by MarketWatch had expected a rise to 5.2 as activity recovered in the aftermath of disruptions caused by Hurricane Sandy. See: N.Y. manufacturing declines for fifth month.

Reuters Enlarge Image Gold hovers below key $1,700 level.

As the trading year winds down, �we�re not seeing a lot of activity and, usually, quiet markets can drift down,� said Newsom, adding that gold could pull back to the $1,670-to-$1,675 range by the end of 2012 or, at the latest, by mid-January before he believes they would stabilize.

The $1,700 level is �a key psychological level more than anything. We have seen a lot of trading around that figure, so the fact that price is struggling here suggests to me that the path of least resistance is to the south,� wrote Fawad Razaqzada, technical analyst at GFT Global Markets, in a email.

Overall, investors will remain focused on the so-called fiscal-cliff talks in Washington, said Newsom. Congressional leaders and the White House have been struggling to come up with a deal to avert automatic U.S. tax increases and spending cuts that could spur recession next year.

�The ongoing debate � who�s going to do what, who�s going to compromise where � is going to be the backbone of the financial markets; for the dollar, or gold or copper or stocks,� said Newsom. �A lot of this is going to have to do with the latest headlines surrounding this fiscal-cliff fiasco.�

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Gold last week fell 0.5%. The biggest decline was on Thursday, when prices tumbled $21.10, or 1.2%. Investors sold gold following the Federal Reserve�s plan to expand monetary stimulus and tie future interest-rate moves to the level of unemployment. Investors also booked profit following a lengthy positive run for the precious metal.

On Monday, it was U.S. stocks that traded higher, underpinned by hopes that budget negotiations were making progress. The S&P 500 index SPX �climbed 1.2%. The dollar index DXY �moved in a choppy, shallow range against most major rivals, though it rallied against the Japanese yen. Read about Monday's action in currencies.

Among other metals contracts, March palladium PAH3 �turned lower, settling down $3.75, or 0.5%, at $698.30 an ounce, as January platinum PLF3 �fell $6, or 0.4%, to $1,608.50 an ounce.

Silver for March delivery SIH3 �slipped 2 cents, or 0.1%, at $32.28 an ounce, notching its lowest settlement since early November. Copper for March delivery HGH3 � shed 1 cent, or 0.5%, to $3.67 a pound.

In other developments in the metals space Monday, the Securities and Exchange Commission approved the first physical copper-backed exchange-traded fund. J.P. Morgan Chase & Co. JPM �plans to list the JPM XF Physical Copper Trust on NYSE Arca. The SEC�s approval came despite some complaints that such a fund would make the industrial metal more scarce. See: SEC OKs J.P. Morgan plans for physical-copper ETF.

Japanese election = support for gold?

Also Monday, there were some hopes that Japanese election results would provide support for gold prices in the short term.

There �are signs that the current price weakness is not sustainable ... and we envisage prices climbing significantly again in the medium term. Yesterday�s election in Japan, for example, is likely to have far-reaching consequences, among other things for the policy of the Japanese central bank,� said analysts at Commerzbank, in a note to investors.

Click to Play China clears new road for economy

As China grapples with slowing growth, the country's new leaders have set priorities for economic reforms.

A coalition of the Japan Liberal Democratic Party, led by Shinzo Abe, and a junior partner gained more than two-thirds of the 480 seats up for election to the lower house of parliament on Sunday.

Analysts said that raises greater policy potential for aggressive fiscal and monetary expansion. Monetary easing in general tends to be a positive for gold because it encourages investors to buy the commodity to hedge against the declining value of weakening paper currencies. See: Dollar gains on yen after Japan elections

�This week may in fact already see the Bank of Japan increasing its bond purchasing program yet again, for election winner Abe (LDP) plans, among other things, to kick-start the economy and beat deflation by implementing aggressive monetary policy,� said the Commerzbank analysts.