TRD: Gold rises towards $1,245/oz as equities drop
Gold prices rose above $1,245 an ounce in Europe on Wednesday due to weakness in the dollar and a second day of stock market declines, which led investors to seek a haven from risk.
Investment flows lifted holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, to a new record high at 1,313.135 tonnes on Tuesday.
Spot gold was bid at $1,245.65 an ounce at 1124 GMT, against $1,239.00 late in New York on Tuesday. US gold futures for August delivery rose $5.80 an ounce to $1,246.70.
'Overall it is holding up pretty well, and renewed risk adversity will ensure the market stays bid, but it looks a bit tired so there is a fear that it may need to correct more in order to attract new buyers,' said Saxo Bank senior manager Ole Hansen.
On the currency markets, the euro climbed against the dollar, while the US currency dipped 0.2 per cent against a basket of six other currencies. Weakness in the US unit typically lifts gold's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.
The inverse relationship between the dollar and gold is becoming reestablished after weakening earlier in the year when both assets benefited from risk aversion.
'We are entering into the low liquidity time of year and markets will be looking for any kind of direction,' said Hansen.
'This will probably play into the hands of the old relationship as a lack of other news may entice day traders to focus on the dollar relationship.'
The markets are now awaiting an announcement on interest rates from the US Federal Reserve at 1815 GMT. The bank is expected to keep rates on hold at a record low 0-0.25 per cent.
'The accompanying statement by the US central bank is eagerly awaited,' said Commerzbank in a note. 'Should interest rates be kept at a low level long term, the US dollar could come under pressure and this could generally support gold.'
Gold also benefits from persistently low interest rates because they cut the opportunity cost of holding non-interest bearing assets such as bullion.
Investment in gold ETFs climbed on Tuesday, with the SPDR ETF noting a 5 tonne rise in its holdings, while ETF Securities said holdings of the five gold exchange-traded commodities it operates from London rose more than 22,600 ounces.
On the supply side of the market, Japan's biggest bullion house, Tanaka Kikinzoku Kogyo, said on Tuesday it recycled 2.9 tonnes of gold from the country's households in the year to May 31, the first year of its recycling programme.
In a note, Bank of America-Merrill Lynch said it was keeping its price target for gold at $1,500 an ounce, which it expects to see by the end of 2011. It lifted its average gold price forecasts to $1,200 in 2010, $1,350 in 2011 and $1,400 in 2012.-Reuters
