Gold rose more than 1 percent on Tuesday, breaking ranks with the euro and equities, as a massive European bailout deal had investors buying the metal amid doubts the bailout will work.
Gold rallied to its highest in more than two weeks after euro zone finance ministers agreed a 130-billion-euro (US$172 billion) rescue for Greece. Analysts said the deal bought time for the single-currency bloc but left deep doubts about Greece’s ability to recover and avoid default.
Bullion has benefited from news that China recently cut its required reserve ratio and committed to help the euro bloc. The metal already received a strong boost after the U.S. Federal Reserve last month said it would keep rates near zero at least until late 2014.
“Gold gets a boost from the EU kicking the can down the road“, said Rob Kurzatkowski, senior commodity analyst at optionsXpress.
“Not only does the bailout perhaps delay the inevitable (Greek bankruptcy), but it also opens the door for higher inflation across the euro zone“, he said.
Spot gold rose 1.3 percent on the day to $1,755.81 an ounce by 3:01 p.m. EST (2001 GMT), having earlier hit a high of $1,757.40, the loftiest price since Feb. 3.
Bullion posted its biggest one-day gain in two weeks. A near $3 rally in U.S. crude futures to nine-month highs amid possible supply disruptions due to rising tensions between Iran and the West also boosted gold’s inflation hedge appeal.
U.S. COMEX April futures settled at $1,758.50 an ounce, up $32.60 from Friday’s close as traders returned after Monday’s U.S. Presidents Day holiday.
Analysts said gold outperforming the U.S. stock markets and other riskier assets highlighted underlying inflation worries and lingering doubts on Greece’s ability to avert a chaotic default in the long run. Both the S&P 500 and euro traded in the negative territory.
However, gold could face strong headwinds as liquidity appears to tighten for European banks soon.
The European Central Bank wants its second offer of cheap ultra-long funds next week to be its last, putting the onus back on governments to secure the euro zone’s longer-term future.
The positive 30-day log correlation between gold and the euro has risen to near 0.5 up from 0.3 last week, indicating a stronger positive link between the two.
“Gold is trading more like the other metals – as a risk asset, rather than a risk hedge“, Citigroup analyst David Wilson said.
Even though gold has at times failed to rally in response to euro zone debt fears, investors have snapped up almost as much of the metal through exchange-traded products so far this month as they did in the whole of January.
Holdings of gold in the world’s major ETPs are set for a rise of more than 600,000 ounces so far in February, marking a second straight month of net inflows.
Silver was up 2.2 percent at $34.29 an ounce, shrugging off a decline in imports by China.
Original Source: Reuters