Gold extends gains for third day on asset grab

NEW YORK Wed May 26, 2010 3:36pm EDT

NEW YORK (Reuters) - Gold rose about 1 percent on Wednesday, building its best three-day gain since January, as traders hedged against further euro-zone debt turmoil and drew support from unabated investor desire for asset protection.

After rallying earlier this week as investors fled riskier assets in search of safer havens, gold gained in tandem with equities and industrial commodities on Wednesday, maintaining this month's rare correlation with the U.S. dollar.

Apart from ongoing credit concerns over some tenuous European sovereign debt, gold was lifted by news that the biggest exchange-traded fund had seen its biggest one-day increase in physical holdings since February 2009, strong evidence of retail demand for hard assets.

Spot gold rose 0.9 percent or $11.05 to $1211.15 an ounce by 3.19 p.m. EDT

Benchmark U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange settled $15.40, or 1.29 percent, higher at $1,213.40 an ounce.

"These days, it tends to move up in general whether the dollar goes up or not. Gold has been tracking, and moving with, the dollar for the bulk of 2010," said Rick Bensignor, chief market strategist at Execution Noble LLC in New York.

"For people who bought the dollar up as a hedge against the euro's going down, it gave them some reason in a non-traditional sense of buying gold as asset protection."

The euro fell for a third straight session against the dollar, hurt by nagging fears over European debt.

Prices have been recovering after falling about 4.5 percent last week. Concerns about euro zone sovereign debt sparked selling of assets seen as higher risk, like stocks and other commodities. Some investors also sold commodities to increase their cash positions.

"Once the correction had run its course, buyers felt more comfortable about jumping in again," said Ole Hansen, senior manager at Saxo Bank. "ETF holdings still making new highs is also supporting the move."

Holdings of the world's largest gold exchange-traded fund, New York's SPDR Gold Trust, rose 30.4 tonnes on Tuesday to a record 1,267.3 tonnes, its biggest one-day inflow since February 12, 2009. The 108-tonne inflow into the SPDR fund this month alone is worth some $4.179 billion.

"The combination of factors has seen investors shift money out of equities and riskier assets, toward the safe havens of gold and certain government bonds," Standard Bank said in a research note.

Citing the COMEX August contract, because the May 28 first notice day for June would force deliveries beyond this week, Bensignor said, consecutive higher closes above $1,218.60 in the August contract sets up for a bullish move to targets at $1,270 to $1,300 an ounce sometime in the next month or two.

He emphasized that the consecutive gains would need to continue to be higher for his outlook to remain in tact.

August gold closed up $15.50 at $1,215.30.

Geopolitical concerns centered on the Korean peninsula, where tensions are increasing, were also cited by some analysts as supportive for gold.

COMMODS, EQUITIES REBOUND

Commodity and equity markets rose as investors bought shares of beaten-down stocks and metals following recent sharp losses. .N European equities bounced back from nine-month lows hit a day earlier, extending gains after U.S. durable goods data beat expectations.

(Additional reporting by Pratima Desai and Jan Harvey; )

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