US gold surges to contract high on oil; stock woes

NEW YORK (Reuters) - U.S. gold futures rallied 2.6 percent to finish near a contract high on Wednesday, after a surge in crude oil prices sparked fears of inflation and a possible recession in the United States.

"You have the combination of a sharply falling dollar and a strong rise in oil prices. These are typically positive for gold," said Patrick Fearon, precious metals analyst with A.G. Edwards & Sons in St Louis.

Most-active gold futures for February delivery GCG8 settled up $22.0 or 2.6 percent at $860.00 an ounce on the COMEX metals division of the New York Mercantile Exchange, trading between $837.50 and $864.90--a contract high.

Spot gold XAU=, which spiked to an all-time peak on Wednesday, also lifted the futures market.

Spot gold hit a record high of $861.10 an ounce, surpassing its previous peak of $850 set in January 1980. At 2:25 p.m. EST (1925 GMT), bullion traded at $855.70/$856.50, against Monday's late quote of $832.60/$833.40 in New York.

Oil vaulted to a record $100 a barrel on Wednesday, boosting gold's appeal as a hedge against inflation. Violence in Nigeria, tight energy stockpiles and a weaker dollar triggered a surge of speculative buying in crude oil. U.S. crude futures CLc1 settled up $3.64 at $99.62 a barrel.

"One hundred dollars is just the beginning ... This is kicking off what you are going to see this year: There will be huge moves up in gold, and huge moves up in crude," said Zachary Oxman, senior trader with Wisdom Financial in Newport Beach, California.

Gold was also boosted as a safe-haven investment as U.S. stocks dropped 2 percent after manufacturing data showed signs of contraction and oil hit $100 a barrel, raising the possibility of a recession in 2008.

"What gold is showing by going to a new high is that gold acts as an economic fever thermometer, and it is clearly indicating that there is more financial trouble on the horizon," said Greg Orrell, portfolio manager overseeing $150 million assets at OCM Gold Fund in Livermore, California.

However, Orrell said that gold still failed to generate more interest from general investors despite the metal's performance.

"The intuitional investors still remain for the most part on the sideline. Though there is beginning to be a creeping level of interest, understanding that they need to have some type of hedge, but not yet acting on it entirely," Orrell said.

Other analysts are less bullish about gold's strength, and traders said that market volatility also peaked.

"Usually a breakout like this would be taken as a positive sign. My only concern is that this has all happened when trading is still relatively thin because of the holiday week," A.G. Edward's Fearon said.

"There certainly are things that should make investors think twice. Most importantly, the developing slowdown in the U.S. and the worldwide economies. That could very well be a negative for gold in 2008, and that could dampen some of the buying interest," said Fearon.

COMEX estimated final gold futures volume at 161,791 contracts, with gold options at 31,070 lots. Total turnover in Chicago Board of Trade electronic 100-oz gold futures was 25,550 lots at 3:01 p.m. www.cbot.com/cbot/pub/page .

Looking forward, the U.S. payrolls data for December due to be released on Friday could also set the near-term direction for the precious metals market.