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Gold Continues Surge: 'It's Difficult Not to Be Bullish'

Wednesday, 10 Aug 2011 09:19 AM

Gold rose on Wednesday, rebounding after the last session's drop from record highs, as concerns over U.S. and euro zone debt lingered and after the Federal Reserve said interest rates would stay near zero for at least two years.

The metal was below the all-time peak of $1,778.29 an ounce it hit on Tuesday, as equities recovered from the heavy losses they suffered early this week, but prices remain elevated.

Spot gold was up 0.6 percent at $1,754.54 an ounce early Wednesday.

Gold has rallied nearly 6 percent so far this week after a downgrade to the U.S. credit rating on Friday battered assets seen as higher risk, helped by simmering worries over euro zone debt and the U.S. economic outlook.

"When you have a metal that has three or four distinct reasons why it has headed higher, it is very difficult not to be bullish in that environment," said Mitsui Precious Metals analyst David Jollie. "Given how far and how quickly we've run up, the move seems somewhat overextended. But this is a market where people are worried, they're concerned about risk, and gold has certainly benefited strongly from its safe-haven status."

The Fed on Tuesday promised to keep interest rates near zero for at least two more years and said it would consider further steps to help growth.

The comments had a two-way impact on gold. On the positive side, it supported the view that the opportunity cost of holding non-yielding gold would remain depressed. It also boosted equities, however, taking some heat out of appetite for gold as an alternative to assets seen as higher risk.

World shares bounced back on Wednesday, while European stocks recovered from a two-year low.

The news weighed on the dollar , another positive for gold, although the link between the assets has weakened in recent years. The safe-haven Swiss franc , meanwhile, eased after further official steps to try to turn back its rise.

"Currency market interventions from both the Swiss National Bank and the Bank of Japan undermine the franc's and the yen's safe-haven properties, as both central banks seek to reverse the rapid appreciation of these safe-haven currencies," said VTB Capital in a note.

ETF Flows Choppy

Holdings of gold-backed exchange traded funds (ETFs) were choppy.

Global ETF holdings, calculated by Reuters, fell 7.2 tons on Tuesday in their first daily decline in 13 sessions. The world's biggest gold-backed ETF, New York's SPDR Gold Trust , reported its biggest one-day outflow since Jan. 25 on Tuesday, of just over 13 tons. A day before it had seen its largest daily inflow since May last year.

A large outflow was also seen from the iShares Silver Trust , the main silver ETF, earlier this week. The trust said its holdings dropped by nearly 120 tons on Monday, the most in a single day since mid-June. They were unchanged on Tuesday.

The ratio of gold to silver prices hit its highest level since early February in that session, as silver was caught up in wider selling of commodities as gold climbed. It is currently near 46, off a 28-year low of around 31 hit in April.

"One explanation for weaker silver prices in the face of continued gold gains is that as an industrial metal, the prospect of slowing economic growth in many (Organization for Economic Co-operation and Development) nations would likely undercut silver demand," said HSBC in a note.

"Also silver does not generally benefit from the same measure of buying in times of financial stress as gold, as it lacks gold's credentials as a safe haven," it added. "(But) one of the reasons for silver lagging gold may be that the bullion rally could be beginning to tire."

Silver was up 1.4 percent at $38.16 an ounce. Spot platinum was flat at $1,749.49 an ounce, while spot palladium was up 1.2 percent at $742.47 an ounce.

Gold regained its premium over platinum on Wednesday after hitting parity for the first time since Dec. 2008 earlier this week. It is expected to widen if confidence in the economic recovery remains fragile.

© 2017 Thomson/Reuters. All rights reserved.

 
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Gold rose on Wednesday, rebounding after the last session's drop from record highs, as concerns over U.S. and euro zone debt lingered and after the Federal Reserve said interest rates would stay near zero for at least two years. The metal was below the all-time peak of...
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2011-19-10
Wednesday, 10 Aug 2011 09:19 AM
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