Gold rises 1-1/2 month high on economic worries

NEW YORK Mon Aug 16, 2010 3:23pm EDT

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NEW YORK (Reuters) - Gold rose to a 1-1/2 month high on Monday, gaining for a third consecutive session, after gloomy Japanese economic data prompted safe-haven buying by investors worried about the global economy.

Silver and platinum group metals, whose prices usually reflect economic sentiment because of their industrial uses, rose with gold. A sharp drop by the dollar also boosted gold, which resumed its usual inverse correlation with the dollar.

"The weakening U.S. dollar, and obviously the continuing the high degree of uncertainty about the global recovery are all helping gold prices," said Peter Buchanan, senior economist, CIBC World Markets in Toronto.

Gold benefited as the dollar fell broadly on negative sentiment stemming from weak Japanese growth data, with an anemic 0.1 percent rise in the second quarter, and analysts see weakness ahead.

Spot gold rose to $1,224.75 an ounce by 3:05 p.m. EDT (2005 GMT) from $1,214.50 late in New York on Friday. It hit an intraday day high of $1,227.15 -- its highest since July 1. Bullion struck a record high around $1,264 in June.

U.S. gold futures for December delivery settled up $9.60 at $1,226.20 an ounce.

Gold managed to hold firm above $1,200 an ounce after the U.S. Federal Reserve's downgrade of its economic outlook, sending Wall Street down more than 3 percent last week.

Gold, which had traded in a broad range for two months, has been in rally mode after a 1.5 percent rise last Thursday on worries about a double-dip recession after a flurry of weak economic data and the Fed's reassessment.

On Monday, the metal rose in tandem with rising U.S. Treasury prices, with the 10-year yield hitting a 17-month low as weak economic growth around the world spurred talk of deflation. Gold tends to fall as the metal's safe-haven appeal is eroded when Treasuries prices rise.

CIBC's Buchanan said the move suggested that safe-haven flow has been going into both gold and Treasuries.

Expectations of governments keeping interest rates low also boosted the metal and other assets.

"You can consider this to be safe-haven buying. It is also supported by the overall low interest-rate environment that makes gold additionally attractive to investors," said Alexander Zumpfe of Heraeus Metals.

Analysts said that gold's recent rise was backed by physical buying as jewelers began to stock inventory ahead of higher demand toward the end of the year.

Physical gold demand tends to rise in August as jewelers stockpile inventory ahead of the start of India's wedding season and the Hindu festival of Dhanteras, traditionally major gold-buying events.

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Analysts said that gold appeared to reestablish its inverse correlation relationship with the dollar and a positive link with the euro.

The 25-day simple correlation between gold and dollar was a plus 0.2 on Monday, sharply lower than a high of over plus 0.8 earlier in August.

The correlation between gold and the U.S. currency has largely been erratic so far this year, as the metal and the dollar both benefited from safe-haven demand due to fears about global growth at times.

In other metals, silver rose in line with gold, trading at $18.39 an ounce from $18.08 late on Friday in New York. Platinum firmed to $1,528.50 an ounce from $1,520 an ounce and palladium rose to $483 an ounce from $472.

(Additional reporting by Rebekah Curtis and Veronica Brown in London; Editing by Marguerita Choy)

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