Gold reprises haven role in four-day rally

(Reuters) – Gold hit one-month highs on Wednesday in its longest stretch of gains in over two months as investors sought the safety of bullion in the face of an uncertain outcome to a key EU summit and after a surprisingly poor read of U.S. consumer confidence.

Expectations of a comprehensive solution emerging from a second European Union summit in four days have diminished as officials wrangle over how to scale up the euro zone rescue fund and over how much of a loss private bondholders will take on Greek debt.

Equity markets in Europe have risen by 0.8 percent so far this week, propelled by hopes of a resolution to the crisis and by healthy U.S. earnings, while the euro is flat so far and gold is up by more than 4 percent.

Gold rose above $1,700 an ounce for the first time in a month on Tuesday, driven by data on U.S. consumer sentiment that showed confidence among shoppers in the world’s largest economy fell to its lowest in 2-1/2 years this month.

Gold appeared to reprise its traditional role as a contrarian indicator after having behaved more like a risk-related assets over the last five weeks and having tracked equities and copper more closely than at any time in the last five months.

Spot gold was last up by nearly 0.6 percent at $1,711.99 an ounce by 1114 GMT, having risen by as much as 1.1 percent earlier to a session high of $1,719.80.

U.S. gold futures for December delivery were last up 0.8 percent at $1,713.80 an ounce, having seen their largest traded volume in a week on Tuesday, above 195,000 lots, or 19.5 million ounces, topping the 30-day rolling average level of daily volume by its widest margin in a month.

“After the release of the weak U.S. consumer confidence, bond yields dropped and that pushed gold prices higher. Now we are above $1,700, which is good because the technical momentum is looking better … this is already in itself encouraging,” said Credit Suisse analyst Tobias Merath.

“The EU summit is a bit of a two-edged sword. If the package is deemed credible, that would have to bring down bond yields across euro zone countries but would also bring down the perceived credit risk, which is negative for gold,” he said.

“Now with the price jump we had yesterday, we have a bit more momentum, and the bigger picture for gold is that there will be no interest rate hikes due from any of the major central banks.”

Graphic: euro crisis meetings’ market impact: link.reuters.com/van64s

Graphic: Platinum remains in discount to gold: link.reuters.com/war64s

LOW-RATE BOOST

Gold tends to perform strongly in an environment of low real interest rates, which include the impact of inflation. It pays no yield but also bears no credit risk as a government bond would.

Most of the major developed-market central banks, including the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan, are set to keep monetary policy as loose as they can to ward off recession, and gold stands to benefit from both low rates and heightened uncertainty.

“With Europe teetering on a knife-edge, gold has once again resumed its role as the custodian of safe and perhaps sane wealth,” said Ross Norman, director of bullion broker Sharps Pixley.

“The financial markets are giving a very clear signal. They are saying that they doubt that the 27 EU nations will reach an accord on policies to resolve sovereign debt while stimulating economic growth. The market is looking for specifics, and not generalities. There is a sense that we have heard too much talk and we need clear, cogent and doable proposals.”

In the latest development from the summit, a phrase calling on the European Central Bank to continue its “non-standard measures” is likely to be dropped out of conclusions drafted ahead of the summit later on Wednesday following Germany’s opposition, a senior euro zone source said.

In other metals, silver was last up 0.8 percent at $33.52 an ounce, echoing the strength in gold, while its correlation with bullion reached a three-month high of 86 percent.

Platinum was last up 0.6 percent at $1,565.24 an ounce, while palladium was up 1.3 percent at $645.22.

By Amanda Cooper

LONDON | Wed Oct 26, 2011 7:32am EDT

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