Gold rises on light investment demand

NEW YORK/LONDON Fri Oct 16, 2009 4:22pm EDT

A woman buyer looks at gold bangles at a jewellery shop in Mumbai October 8, 2009. REUTERS/Arko Datta

A woman buyer looks at gold bangles at a jewellery shop in Mumbai October 8, 2009.

Credit: Reuters/Arko Datta

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NEW YORK/LONDON (Reuters) - Gold rose slightly on Friday, erasing initial losses as light investment buying shook off worries about the banking sector stirred by a quarterly loss posted by Bank of America.

Gold prices ended the week largely unchanged compared with last Friday's level, as a combination of technical weakness, renewed credit concerns and record speculative long positions in the futures market prompted selling in gold.

Spot gold scaled a record high of $1,070.40 an ounce on Wednesday. New York gold futures hit a record high of $1,072 on Wednesday.

Spot gold was at $1,052.80 an ounce at 2:56 p.m. EDT, versus $1,049.85 late in New York on Thursday.

December gold futures settled up 90 cents at $1,051.50 an ounce in COMEX trade.

On Friday, gold's rise was capped by a resurgent dollar.

The dollar hit session highs against the euro after Bank of America reported a net loss of $1 billion in the third quarter of 2009 compared with a profit over the same period last year.

"Gold is following the dollar very closely," said Andrey Kryuchenkov, analyst at VTB Capital. "The market has run ahead of itself and a stronger dollar is a trigger to sell."

Bank of America's results follow disappointing results on Thursday from Goldman Sachs (GS.N) and Citigroup (C.N).

"We're still in an upside trend on the (stock) market, but it won't last unless we see companies' revenues starting to rise again. And it's not the case for now," said Jacques Henry, analyst at Louis Capital Markets, in Paris.

A higher dollar makes commodities priced in the U.S. unit more expensive for holders of other currencies. That relationship has been reinforced by gold's role as an alternative to the dollar.

Traditionally investors buy gold when they fear inflation or financial market turbulence, but gold is seen as overvalued at current levels and many investors are opting for U.S. Treasuries, which means they have to buy dollars.

"Gold has been long overdue a correction on the downside. It's lost momentum up here," said Simon Weeks, director of precious metals at Bank of Nova Scotia. "I wouldn't be surprised to see it back below $1,000."

Bullion posted slight gains in spite of a rally in oil, which has risen for the past seven straight days, outperforming gold. Gold is used as a hedge against inflation.

A closely watched gold-to-oil ratio has dropped to below 14. Technical traders often switch positions between gold and oil when one is perceived to be cheaper relative to the other.

Appreciating oil prices, often seen as a trigger for rising inflation, usually lift gold.

STALLED RALLY?

Lackluster investor interest could be seen at current high prices. Gold holdings by the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, have been flat since October 7.

SPDR holdings stood at 1,109.314 tonnes on Thursday, the highest since early July but still off a record high of 1,134.03 tonnes marked on June 1 and 2. <GOL/SPDR>

"Dollar weakness has stalled temporarily so people have used that as an excuse to take profits," said Daniel Smith, analyst at Standard Chartered. He added gold prices could average $1,140 an ounce in 2010.

However, some analysts expect gold to come under pressure from weak physical demand because prices are too high.

"For the fourth quarter the physical market is not great at this stage," Standard Bank analyst Walter De Wet said.

"There seems to be quite a bit of scrap coming through the market which is adding to the resistance."

Among other precious metals, silver was at $17.41 an ounce from $17.32, platinum at $1,336.50 from $1,348.50 and palladium at $326.50 from $323.50.

(Additional reporting by Rebekah Curtis and Veronica Brown in London; Editing by Lisa Shumaker)

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