Gold rebounds as equities and commodities sell off

NEW YORK (Reuters) - Gold rebounded on Tuesday as a global rout in equities and sharply lower commodities prompted investors to pile in amid renewed fears about European credit contagion.

A Jordanian goldsmith holds gold bracelets at his shop in Amman June 9, 2010. REUTERS/Muhammad Hamed

Fears of a potential liquidity shortfall of more than 100 billion euros in the financial system as European banks repay 442 billion euros ($545.5 billion) in emergency loans sparked the latest sell-off in equity markets, with the Dow .DJI losing over 250 points.

“The longer the stock market stays lower, and with all the commodities trading weaker, investors who initially just sat around are now buying gold in a flight to quality,” said Adam Klopfenstein, senior market strategist at MF Global’s unit Lind-Waldock.

Analysts said risk-averse sentiment benefitted investments perceived as safer during uncertainty, including U.S. two-year Treasury notes whose yields fell to the lowest level on record.

Spot gold was at $1,241.15 an ounce at 3:19 p.m. EDT, against $1,236.05 late in New York on Monday. Bullion rebounded after falling toward $1,220 an ounce in early trade, when investors dumped the metal along with other commodities.

U.S. gold futures for August delivery settled up $3.80 at $1,242.40.

Weak U.S. June consumer confidence data fueled the stock market slump. This weighed heavily on assets like stocks, oil and base metals, though gold, in comparison, remained relatively resilient.

VTB Capital analyst Andrey Kryuchenkov said while risk aversion is still supporting gold, he expects the metal to remain under pressure from the stronger dollar, losses in other commodities and weakness in seasonal physical demand.

“I notice that in extreme cases of persistent flight to safety, (gold and the dollar) trend together, but when matters calm down and the greenback holds strong, gold corrects a little with other metals,” said Kryuchenkov.

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Gold, like other dollar-priced assets, typically weakens as the U.S. currency firms. Early this year that relationship broke down as both were lifted by risk aversion, but the usual link is being reestablished.

The dollar rose sharply against a basket of currencies .DXY on Tuesday, while the euro hit a lifetime low against the Swiss franc and an 8-1/2 year low against the yen due to fears over the expiration of a key euro zone refinancing program this week.

Meanwhile, oil prices fell more than 3 percent to below $76 per barrel as risk appetite dwindled on renewed worries over euro zone debt, while base metals like copper, lead and zinc slid more than 4 percent.

The Reuters-Jefferies CRB index .CRB, a global commodities benchmark, hit a two-week low on Tuesday.


Investment demand for physical gold continued to support prices, with holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust, still at a record high 1,316.177 tonnes on Monday.

But gold is entering a seasonally weak period for physical demand, which could undermine any push higher, analysts said.

“June-August are the months in which demand for gold retreats,” said Societe Generale in a note. “Along with the onset of the vacation period in North America and Europe, the Indian market slows significantly.”

Other precious metals underperformed gold, with silver easing to $18.48 an ounce against $18.68, platinum to $1,538.50 an ounce against $1,565, and palladium to $450 against $466.

The platinum market will see a narrower market surplus in 2010 on the back of strong investment interest during the launch of U.S. platinum-backed exchange traded funds and a recovering auto industry, commodities consultant CPM Group said in a report.

Additional reporting by Jan Harvey in London; editing by Jim Marshall