Gold rose to a seven-session high Tuesday, as rising tensions on the Korean peninsula and mounting worries over a European debt crisis prompted investors to buy both the metal and the U.S. dollar as safe havens.
Gold traded lower through much of the European day on selling pressure related to expiring options at the $1,370 strike. Gold broke higher as traders saw heightened risks in both Europe and the Koreas, with some traders appearing to target the $1,400 mark.
"Gold's up on sovereign risk issues, worries over Ireland, and also the Korean incident, which prompted investors to buy gold and the dollar simultaneously, and that's why the U.S. bond yields are falling," said James Steel, chief commodity analyst at HSBC.
U.S. gold futures rose 1.6 percent to $1,380.10 in active trading. With risk aversion running high, the typical inverse correlation to the dollar collapsed, with the one-day average hourly gold/dollar correlation turning positive for the first time since September, data showed.
North Korea fired artillery shells at South Korea, and investors seeking safety pushed the dollar up by more than 1 percent against a basket of major currencies, while gold rose 1 percent to $1,380 at 12:53 p.m. EST. U.S. Treasury debt prices, which move inversely with yields, climbed on flight-to-safety buying.
Spot silver fell 0.8 percent to $27.59 an ounce amid unusually active futures trading. Holdings of metal in the iShares Silver Trust, the world's largest physically backed exchange-traded fund, hit a record high.
COMEX gold option floor trader Jonathan Jossen said futures prices rose slightly on expiration of the popular COMEX December options, whose open interest was the highest among the $1,350 calls and $1,400 calls.
One trader at a European bank said there were "some big (gold) strikes around $1,370 and that meant that...there was plenty of selling in the market around those levels, so that was putting a bit of a cap on it.
"We've now gone through that option expiry, it looks like the selling's disappeared and we could have a chance to move higher this afternoon," the trader added.
KOREAN PENINSULA IN FOCUS
North Korea fired scores of artillery shells at a South Korean island, killing two soldiers in a sharp escalation of hostilities.
The euro came under pressure on mounting fears that Ireland's debt crisis could spread to other members of the euro zone such as Portugal and Spain and amid signs the Irish government will have trouble passing an austerity budget.
German Chancellor Angela Merkel said the crisis in Ireland crisis was different from the one in Greece but just as worrying and the euro was in an "exceptionally serious" situation.
The traditional inverse relationship between gold and the dollar loosened, echoing events of May this year, when Greece asked for financial aid and bullion's relation to the dollar turned strongly positive as investors shed holdings of euros.
A common gauge for risk, the CBOE Volatility Index jumped 15 percent as rising tensions in the Korean peninsula added to worries about global economic conditions.
Until this week, strength in the U.S. dollar pressured gold, especially following upbeat manufacturing and jobless data last week that suggested the U.S. economy was recovering faster than expected.
Speculators in New York have cut their exposure to gold futures by 4 million ounces in the last month and holdings of gold in the world's largest bullion-backed exchange-traded fund, the SPDR Gold Trust, have fallen by 1.5 percent.
With the U.S. Thanksgiving holiday this week, investors are watching for a batch of data, as well as minutes from the Federal Reserve's meeting on Nov. 2-3, where the Fed decided to launch its $600 billion bond buyback program.
Platinum fell by 0.4 percent to $1,654.24 an ounce, while palladium was down by 1 percent at $684.22.
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