August 6, 2010 / 4:15 AM / 9 years ago

Gold hits 3-week high as U.S. data knocks dollar

LONDON (Reuters) - Gold prices rose more than 1 percent to their highest in three weeks on Friday after data showing U.S. payrolls fell for a second straight month knocked the dollar.

Spot gold rose as high as $1,210.85 an ounce, its strongest since July 15, and was at $1,206.95 an ounce at 1502 GMT (10:02 a.m. EDT), against $1,193.10 late in New York on Thursday. U.S. gold futures for December delivery rose $9.90 to $1,209.20.

The Labor Department said non-farm payrolls dropped 131,000 last month, roughly double the 65,000 fall expected. Private employment, considered a better gauge of labor market health, rose by a smaller than expected 71,000.

Ole Hansen, senior manager at Saxo Bank, said the data had proved “a bad report that could bring forward additional monetary expansion, which can be dollar negative and therefore supportive for gold.”

“It will give investors additional excuses to re-enter gold after the sell-off was rejected ahead of the 100-day moving average,” he added.

The U.S. dollar approached a 15-year low against the yen and fell against the euro in the wake of the data. On the wider markets, U.S. stocks fell sharply in early trade and European shares wilted. .N .EU

Traditionally, gold and the dollar trade inversely, with weakness in the U.S. unit lifting gold’s appeal as an alternative asset and making dollar-priced commodities cheaper for holders of other currencies.

That relationship broke down earlier this year as both gold and the dollar benefited from risk aversion, but appears to be being re-established.

“We saw that negative correlation shift to a positive correlation between the dollar and gold since January, up until the last few weeks,” said RBS analyst Daniel Major.

“Gold is going to fall back more into its traditional relationship with the dollar,” he said.

A Federal Reserve policy meeting next week is now in focus, as a spate of weak economic data has strengthened the argument the Fed may have to take further steps to boost the economy.

ON TRACK FOR GAINS

Gold is on track to post its first weekly gain in four weeks, and its biggest such rise since the week to June 20. In addition to dollar weakness, prices have benefited from China’s decision to open up its gold trade.

China is a key player in a number of commodity markets, but although it is the biggest producer and the second biggest consumer of gold, its trade has typically been largely domestic.

“We believe greater availability of physical gold and gold related financial products and improved accessibility for international players will likely increase the trading volume on the Shanghai gold exchange,” said Deutsche Bank in a note.

“Indeed, since the SGE began physical gold trading for individuals in 2006, trading volume has increased fourfold,” it added. “As a result, we believe China will play an increasingly important role in the global gold market.”

Physical gold demand remained firm in India, with a stronger rupee cushioning local buyers from the impact of rising dollar prices. Buying is expected to continue ahead of a festival season starting with Raksha Bandhan on August 24 and continuing until Dhanteras in November.

Recent outflows from gold exchange-traded funds also seemed to have stalled on Thursday, with holdings of the largest, New York’s SPDR Gold Trust, rising for the first time since mid-July.

Silver rose in line with gold to $18.43 versus $18.31. Data showed holdings of the world’s largest silver ETF, the iShares Silver Trust, fell more than 30 tonnes to 9,151.03 tonnes on Thursday.

Platinum was at $1,566 an ounce against $1,566.75 and palladium at $489.50 versus $492.20.

Editing by James Jukwey

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