NEW YORK/LONDON Gold rose toward a six-month high on Tuesday as the dollar fell following a warning by Moody's Investors Service on U.S. creditworthiness while gold exchange-traded products were in demand by investors.
The metal received a boost after credit rating agency Moody's said the United States may lose its "triple-A" debt rating if next year's budget negotiations do not produce policies that decrease debt.
Gold investor sentiment was already bullish after last week's disappointing U.S. payrolls data raised hopes that the Federal Reserve could unveil new stimulus as early as Thursday at its policy meeting.
"Every piece of bad news seems to be good for gold, only because it translates into something that the Fed has to do to get this economy off the ground," said Anthony Neglia, president of Tower Trading and a COMEX gold options floor trader.
Heavy positioning in COMEX December calls at strike prices above $1,800 an ounce suggests that many investors believe gold could rise further by the end of the year, Neglia said.
Spot gold was up 0.4 percent at $1,731.66 an ounce by 2:55 a.m. EDT (1855 GMT). The price has risen 2.5 percent so far in September to hover near its highest in six months.
U.S. gold futures for December delivery settled up $3.10 at $1,734.90 an ounce, with trading volume currently at about 40 percent below its 250-day average, preliminary Reuters data showed.
Silver rose 0.3 percent to $33.39 an ounce.
Gold also benefits from rising expectations that a German court will back the euro zone bailout fund, even though it also means that any hitch could unleash sharp moves in stocks, bonds and the euro, traders said.
U.S. gold futures open interest, which measures the total number of long and short outstanding contracts, is at a six-month high.
"Rising open interest means lots of funds are back in the market with nervous positions that could result in heavy selling if the market is disappointed by events this week," said George Gero, vice president of RBC Capital Markets.
INVESTMENT BUYING STRONG
Holdings of bullion in exchange-traded products (ETPs), often used as a gauge of investor appetite for gold, rose by 91,932 ounces on the day to a record 72.49 million ounces, following broad-based inflows into most major ETPs.
UBS strategist Edel Tully said in a note that strong buying in gold ETPs has helped offset worries that investors might take profit following a sharp increase in bullish bets in U.S. gold futures by hedge funds and money managers.
Among platinum group metals, platinum climbed 0.6 percent to $1,597.90 an ounce, while palladium was up 0.5 percent at $666.22 an ounce.
(Editing by Marguerita Choy and Alden Bentley)