LONDON: Gold prices rose more than 3 per cent on Tuesday as a drop in the dollar index helped the precious metal snap a four-day run of losses and after an early rout in the previous session tempted price-sensitive physical buyers back to the market.
Prices dropped more than $120 an ounce in Asian trading hours on Monday, an unprecedented intraday fall in value terms, as a rush for the liquidity of the dollar, losses in other markets and a margin hike on CME gold futures prompted selling.
They had pared those losses to just 1.7 per cent by the end of the session, however, and continued their recovery on Tuesday, climbing comfortably back above their 100-day moving average just below $1,640.
Spot gold was up 2.8 per cent at $1,672.00 an ounce at 0949 GMT, having peaked at $1,676.69. US gold futures for August delivery were up $78.40 an ounce, or nearly 5 per cent, at $1,673.20.
"Given that we haven't had any correction for months, this has brought better value to the market for people who want to get back into gold," said Credit Agricole analyst Robin Bhar.
"I think gold's bottomed out here," he said. "Longer term, have all the factors that were bullish for gold really been addressed? Currency debasement, economic imbalances, sovereign debt -- the factors that were there last week are still here today."
On the currency markets, the dollar fell 0.3 per cent against a basket of major currencies after rising nearly 2 per cent last week. A weaker dollar tends to benefit gold, as it makes dollar-priced commodities cheaper for other currency holders.
The euro was also under pressure after comments from Spain's economy minister dampened expectations that European policymakers would take radical action to contain the worsening debt crisis.
Concerns over euro zone debt and the outlook for the US economy were key factors pushing gold prices to record highs above $1,920 an ounce earlier this month, as investors sought assets seen as a haven from risk. The worsening crisis has diverted them towards the dollar, however, at gold's expense.
"Safe-haven demand is centering on the dollar," said HSBC in a note. "Due to the inverse relationship between the dollar and gold, this has helped pressure gold lower."
"The gold market, while liquid, is not as liquid as the dollar. So as investors rush to secure liquidity, the attraction of the dollar is proving to be greater than gold's, at least for the time being."
