Gold rises to highest since July as euro gains

NEW YORK Tue Aug 17, 2010 4:42pm EDT

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NEW YORK (Reuters) - Gold rose to a 1-1/2 month high on Tuesday, gaining for a fourth straight session as the dollar-denominated metal benefited from a stronger euro against the U.S. currency.

Bullion investors also took heart in news that top U.S. hedge fund managers kept their big bets on the metal in the second quarter when the price of gold rallied to an all-time high.

(Graphic: link.reuters.com/hav55n)

COMEX gold floor trader Mihir Dange said bullion appeared to reestablish its positive correlation with the euro, after the relationship broke down earlier this year due to a European sovereign debt crisis.

"It's the euro-dollar relationship more than anything, and gold is following euro's lead. It had decoupled at some point but it's back now," Dange said.

Analysts said gold is strengthening its inverse correlation relationship with the dollar and a positive link with the euro.

Still, the currency correlation 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.

Spot gold hit $1,228.45 -- its highest level since July 1 -- and was at $1,225.65 an ounce at 3:45 p.m. EDT (1945 GMT), against $1,222.85 late in New York on Monday.

U.S. gold futures for December delivery settled up $2.10 at $1,228.30 an ounce.

Trading was quiet in the summer months as volume fell below 60,000 lots, the lowest since August of 2009, preliminary Reuters data showed.

Gold prices rose in tandem with a near 2 percent Wall Street rally after data for July showed new home construction rose and producer prices climbed for the first time in four months.

Gold, which had traded in a broad range for two months, has been in rally mode on worries about a double-dip recession after a flurry of weak economic data and the Federal Reserve's downgrade of its economic outlook.

Recent successive gains suggested the metal is poised to rally again, analysts said, as it posted its biggest four-day rise in 2 months on Tuesday.

"We think it's a good sign that the market has been able to recover from a bit of weakness in June and July when the technical picture didn't look so good," Credit Suisse analyst Tobias Merath said.

"The longer term outlook is fairly encouraging with dollar weakness and more importantly after the U.S. Federal Reserve meeting, bond yields dropped. This is positive as it reduces the opportunity cost of holding gold," he added.

FUND INTEREST STRONG

Prominent U.S. hedge fund manager Eric Mindich's Eton Park Capital invested nearly $2 billion in options and equity shares of SPDR Gold Trust in the second quarter, a U.S. regulatory filing showed.

Interest among others institutional investors remained steadfast in the second quarter, when gold prices rose nearly 12 percent to a record high of $1,264.90 an ounce on June 21.

On July 1, however, gold prices tumbled more than 3 percent on a technical break and fund selling.

John Paulson's Paulson & Co. Inc featuring SPDR Gold Trust and Anglogold Ashanti (ANGJ.J) showed no change on the quarter ending June 30.

Billionaire investor George Soros also stuck with his big bet on gold. The fund firm said it owned 5.24 million shares of the SPDR Gold Trust worth $638 million as of June 30.

COMEX floor trader Dange cited lingering economic uncertainties for the strong fund interest.

"If there was another bank or country failure, I don't think it would surprise anybody. As long as there is uncertainty, there is a need for flight to quality, and the first direct investment will be gold," Dange said.

Among other precious metals, silver was at $18.63 an ounce versus $18.35.

Silver markets largely ignored supply issues as Bolivian protesters ended more than two weeks of demonstrations on Monday that disrupted operations at two of the world's top silver deposits.

Platinum was at $1,538 an ounce versus $1,529.00 and palladium at $494 against $480.50.

(Additional reporting by Michael Taylor and Veronica Brown in London; editing by Jim Marshall and Sofina Mirza-Reid)

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