Gold up as EU deal sinks dollar, boosts commods

NEW YORK Thu Oct 27, 2011 4:44pm EDT

Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011. REUTERS/Lisi Niesner

Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011.

Credit: Reuters/Lisi Niesner

NEW YORK (Reuters) - Gold rose 1.5 percent on Thursday, boosted by gains in equities and commodities as the dollar dropped after a euro zone agreement to boost the region's bailout fund and slash Greece's debt.

Even as many investors returned to riskier assets, gold also benefited from some safe-haven flows by investors who remained wary about the euro zone agreement until more details emerge.

Gold rose for a fifth straight session, and silver surged 5 percent after the EU leaders struck an agreement under which banks would accept 50 percent losses on their Greek debt holdings in a bid to cut Athens' debt to sustainable levels.

Bullion's inflation-hedge appeal received a huge boost as the EU deal also foresees a recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund to 1.0 trillion euros ($1.4 trillion).

"This is not a magic elixir. It's a very good start and certainly more than people had expected," Bill O'Neill, partner at commodity investment firm LOGIC Advisors, said of the euro zone deal.

Spot gold was up 1.5 percent at $1,745.10 an ounce by 3:03 p.m. EDT. It is up 8 percent in five sessions, rising both with risk assets and safe-haven flows.

The S&P 500 U.S. stock index rallied over 3 percent on Tuesday, while U.S. Treasury bond prices, usually viewed as a safe haven, fell sharply.

U.S. gold futures for December delivery settled up $24.20 at $1,747.70 an ounce. Volume was slightly below its 30-day average but higher than the extremely low turnover in the last two weeks.

Silver gained 5.6 percent to $35.25 an ounce, its biggest five-day rally in over three years and largest one-day increase since early May.

Bullion initially dropped as safe-haven buying faded after news of the EU agreement and after U.S. data showed consumer and business spending boosted the world's largest economy to its fastest growth pace in a year.

The precious metals later rose as Wall Street accelerated gains and as commodities led by copper rallied 6 percent, underpinned by a sinking dollar and hopes that economic growth would feed raw materials demand.

"Unless there is a huge collapse in the stock market, I think the selling pressure for gold is over," said Adrian Day, president of Adrian Day Asset Management, which manages $160 million in assets.

GOLD UP ON QE3?

Gold has also benefited from worries about a potential new round of monetary easing by the U.S. Federal Reserve.

"The gold market always thinks a step ahead. Now that Europe is patched up for a few weeks, people are thinking about QE3," said Axel Merk, portfolio manager at Merk Funds, which manages currency mutual funds with $800 million in assets.

On Monday, New York Fed President William Dudley said another round of quantitative easing, or QE3, is an option the U.S. central bank could take to boost the anemic U.S. economy. The Bank of England this month voted to boost growth by quantitative easing.

The Fed is debating setting guideposts for interest rates based on inflation and unemployment, but no policy shift is expected at its next FOMC meeting on November 1-2.

In other precious metals, platinum rose 2.7 percent to $1,632 an ounce. Palladium climbed 3.6 percent to $664.97 an ounce, set for a 9-percent rise so far this week, its largest in almost a year.

(Additional reporting by Amanda Cooper in London; Editing by Dale Hudson)