Gold posts historic gains on flight to safety

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold posted a record one-day gain in absolute dollar terms on Wednesday, hitting a near six-week high with investors fleeing to safety as they watched the carnage on stock markets and expected further losses.

Silver tracked gold higher to record its biggest one-day rise in percentage terms since 1995.

Losses in U.S. investment banking stocks and doubts over the government's bailout of insurer American International Group have fueled fears over the outlook for the financial sector.

Sliding U.S. equity markets and worries about the financial outlook have sparked a flight to "safer" assets, such as bullion, analysts said.

"It's unbelievable, simply unbelievable, what is happening," said Eugen Weinberg, commodities analyst at Commerzbank.

"Investors are insecure and going into gold. There is safe-haven buying from all over the world."

Spot gold rose more than 10 percent to $866.10 an ounce at 2:55 p.m. (1455 GMT) by New York's last quote, up sharply from Tuesday's nominal U.S. market close of $777.55.

"It looks like (gold) has finally found its safe-haven bid," said Standard Chartered head of commodity research Helen Henton.

Gold prices were reacting to deepening fears over the outlook for U.S. investment banks and concerns over the government's rescue plan for AIG, which have sparked fresh buying of commodities.

U.S. gold futures for December delivery settled up $70.00, or 9 percent, at $850.50 an ounce on the COMEX division of the New York Mercantile Exchange. In after-hours electronic trading, gold scaled a high of $872.90, its highest level since August 8.

The U.S. Federal Reserve said in a statement it would extend American International Group $85 billion in exchange for a nearly 80 percent stake to bail it out.

"The AIG situation, rather than calming the waters, created concerns of how many other AIGs are out there," said Bill O'Neill, managing partner of New Jersey-based LOGIC Advisors.

Investment banking shares are also suffering, as Lehman Brothers' insolvency earlier this week raises questions about the future of the sector.

FALLING BANK STOCKS

Shares in Wall Street banks Morgan Stanley and Goldman Sachs plummeted as worries over the outlook for the financial sector multiplied, sparking a rise in oil and gold prices.