Gold rises nearly 2 percent on Greece bailout optimism

NEW YORK/LONDON Tue Feb 7, 2012 3:29pm EST

An employee displays a gold tooth at a shop that purchases gold in the Ginza district of Tokyo August 23, 2011.    REUTERS/Toru Hanai

An employee displays a gold tooth at a shop that purchases gold in the Ginza district of Tokyo August 23, 2011.

Credit: Reuters/Toru Hanai

NEW YORK/LONDON (Reuters) - Gold prices rose 1.5 percent on Tuesday for their biggest daily gain in two weeks, as expectations that a Greek rescue deal will be completed drove the dollar down sharply against the euro.

Bullion, which had dropped in early trade on nervousness about Greece, rebounded to snap two days of losses as Greece's government was preparing a list of reforms needed to clinch a new financing package.

Hopes for a bailout plan that would move Athens closer to avoiding a chaotic debt default boosted gold's inflation-hedge appeal. The metal's rally also sharply outpaced Wall Street's gains.

"If the deal falls apart, the ECB (European Central Bank) is going to be even more aggressive in monetizing things and create credit to insulate the banking system from a disorganized default," said James Dailey, portfolio manager of the TEAM Asset Strategy Fund.

"It's basically a win-win for gold at this point," he said.

Spot gold was up 1.6 percent at $1,746.64 an ounce by 2:49 p.m. EST (1949 GMT). In early trade, gold had dipped as low as $1,709.29, near a two-week low.

U.S. gold futures for April delivery settled up $23.50 at $1,748.40. Trading volume was 15 percent below its 30-day average but largely in line with the recent pace.

Silver climbed 1.8 percent to $34.22 an ounce.

After briefly entering a bear market in December, gold has risen about 10 percent so far this year, surging last month after the U.S. Federal Reserve said it would keep interest rates near zero at least until late 2014 and stood ready to offer extra economic stimulus.

Officials worked on the draft of a text on the 130 billion euro ($172 billion) bailout plan that will be put to Greek leaders for approval. The metal stayed higher even after the meeting to discuss the rescue plan was postponed to Wednesday.

"If we do get a resolution of the current standoff, then gold will likely benefit," said Anne-Laure Tremblay, an analyst at BNP Paribas.

Heavy buying of bullish option strategies and an eight-week high in the euro also lifted gold, traders said.

Michael Matousek, senior trader at U.S. Global Investors, which has over $2 billion in mutual-fund assets, said hopes for a Greek bailout deal had rekindled fears about money printing by central banks, which boosted gold buying.

Gold's gain was also fueled by a technical rally after it broke key resistance at a downtrend line at $1,680 an ounce in late January, analysts said.

On Tuesday, gold's rally gained pace after it breached the previous session's high around $1,735 an ounce.

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Downtrend line broken: r.reuters.com/bub56s

Asset returns in 2012: r.reuters.com/muc46s

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CHINA GROWING APPETITE FOR GOLD

Also boosting gold sentiment was news that Hong Kong's shipments of gold to mainland China in 2011 more than tripled from a year earlier, confirming China's rapidly growing appetite for bullion.

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks.

However, a study of financial assets over the past 112 years by Credit Suisse and several London Business School scholars showed gold prices have been too volatile to play a reliable role as a hedge against inflation.

Among other precious metals, spot platinum gained 1.4 percent to $1,644.18 an ounce, and spot palladium edged down 22 cents at $702.75 an ounce.

(Editing by Dale Hudson)