Gold rises above $1,200/oz on physical demand

NEW YORK Wed Aug 4, 2010 3:14pm EDT

NEW YORK (Reuters) - Gold rose above $1,200 an ounce on Wednesday for the first time in nearly two weeks, as strong physical demand lifted the metal higher for its sixth straight daily gain.

Better-than-expected U.S. jobs and services data and expectations for stronger Chinese bullion demand increased bullion's inflation-hedge appeal, sparking bullion's rally.

Spot gold rose to a high of $1,202.85 an ounce, its strongest since July 23, and was at $1,194.95 an ounce at 1:56 p.m. EDT (1756 GMT) versus $1,185.35 late in New York on Tuesday. U.S. gold futures for December delivery settled up $8.40 at $1,195.90.

With physical demand now flourishing in India and China, the world's top two gold consumers, analysts expect gold to remain firm this year.

Gold continued to rise in the face of a stronger dollar, reversing a trend earlier this year when the metal moved in tandem with the U.S. currency driven by safe-haven demand. <FRX/>

The metal lost 5 percent in July and was sharply below an all-time high at $1,264.90 an ounce set June 21, due to fading safe-haven demand as much of the concern over the euro zone debt burden and recession worries have been allayed by upbeat corporate earnings and better economic data.

The technical picture also improved. Investors are regaining confidence in the yellow metal after prices bounced from a key long-term support area last week.

Tow Pawlicki, MF Global's precious metals and energy analyst, said that the December contract's Wednesday rally lifted prices above a downward channel formed back in late June.

He pegged December's resistance at its 50-day moving average at $1,216, which was near its mid-July highs.

(Graphic: link.reuters.com/nab43n)

"Technically, there are still worries because of the lack of confirmation by higher level of open interest, which has fallen during the last couple of days while the market has rallied -- usually a negative sign," Pawlicki said.

(Graphic: link.reuters.com/vab43n)

Weak U.S. consumer spending and housing data in recent days have fueled speculation the U.S. Federal Reserve may further loosen monetary policy at its August 10 meeting. This may favor gold, which tends to benefit from a looser economic policy.

Analysts said that quantitative easing by the Fed could increase uncertainty that the economy might not have recovered as quickly as people had expected.

CHINA GOLD TRADE

The gold market also continued to take support from news that China vowed to develop its market to make gold trading easier.

China said on Tuesday it will allow more domestic banks to export and import gold as part of steps to encourage more liquid trade, which could underpin the country's growing private demand for the metal.

"The international gold market is now paying a lot more attention to China's gold demand, not just from an official reserve asset perspective, but also private demand," UBS analyst Edel Tully wrote in a note.

"Behind India, China is the second-largest physical consumer," she added. "Therefore any step to integrate, liberalize, and expand this market should, in time, foster a rising appetite for gold."

Platinum was at $1,576 an ounce versus $1,576.50 late Tuesday and palladium at $494 against $498.35.

The metals are chiefly consumed by the car industry for use in autocatalysts. Data released on Tuesday showed U.S. auto sales rose 5 percent in July in an uneven recovery. The rise was the smallest in percentage terms since November.

Silver was at $18.25 an ounce against $18.42 in the previous session, as the market took a breather after recent sharp gains.

(Additional reporting by Jan Harvey and Amanda Cooper in London; Editing by Marguerita Choy)

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