Gold toys with one-month highs as demand blooms

Gold rallied for a second day on Wednesday, hitting its highest in a month after a stronger euro helped boost the price above a key technical level and evidence of strong demand from major consuming nations further supported the market.

Gold has risen by 1.5 percent so far this week, in line with a modest pick-up in the euro, which is battling against fresh concerns about the ability of several euro zone nations to fund themselves given sovereign debt yields remain high and there is no immediate solution in sight to the crisis.

The gold price vaulted above the 200-day moving average around $1,635 an ounce on Tuesday, which prior to December’s sell-off had marked an important level of support, but since then has acted as stiff overhead resistance.

The break to a one-month high of $1,646.90 an ounce has given investors more confidence to buy the metal, especially in light of improved demand in India, where the rupee’s rise against the dollar has cut the cost of buying bullion for local consumers and in light of a sharp rise in Chinese imports.

Spot gold was up 0.5 percent at $1,640.50 an ounce by 1105 GMT. US February gold futures were up 0.6 percent at $1,641.60 an ounce.

“Gold has come well through that (the 200-day moving average) and I would not be surprised if some of the buying we are seeing is short-covering. This is a big relief for gold bulls that, in fairly short order, we’ve managed to overcome that technical level,” Ross Norman, director at bullion dealer Sharps Pixley, said.

“The other thing I think that is fairly significant is the Chinese story … the imports from Hong Kong have been phenomenal,” he added.

China imported nearly a fifth more gold from Hong Kong in November than the previous month, continuing a trend of sharply rising purchases that has seen bullion flows to the mainland more than treble in the first 11 months of the year.

A record 102.525 tonnes of gold entered the mainland from Hong Kong in November, pushing the total gold flow in the first 11 months of the year to 389.295 tonnes, said the Hong Kong Census and Statistics Department.


The volume of gold traded has risen in the last week, indicating more investors are active in the market once more.

According to data from CME Group, which offers the benchmark gold futures contract, volume on Tuesday topped 160,000 lots, reaching its highest since early December and about 25 percent above average turnover on a rolling-one month basis.

“While the dollar may not see a significant correction soon, and is likely to continue to gain against the euro as the euro zone crisis persists, the negative effects of a stronger dollar on gold are likely to be largely diminished in 2012, allowing the bullish macro drivers to dictate price action once again,” Societe Generale said in a research note.

The prospects of aggressive monetary easing from the world’s key central banks, including the European Central Bank, will keep sentiment for gold and silver bullish, it also said.

Gold usually trades inversely to the dollar, falling as the US currency rises, when non-US investors find it more profitable to sell the metal and book a higher profit when exchanging the dollars back into their own currencies.

The correlation between gold and the dollar reached its most negative in 14 months last week, around -70 percent, although this relationship has eroded in the last few trading days to closer to -50 percent, meaning the gold price is less likely to suffer if the dollar picks up.

Adding to the support for gold, dealers reported strong physical demand from India, the world’s largest bullion buyer, after the rupee hit a one-month high against the dollar.

In other precious metals, silver was up 0.2 percent on the day at $30.04 an ounce.

The gold/silver ratio, the number of ounces of silver needed to buy one ounce of gold, is around 54.78, having risen from 54.22 a week ago, indicating gold’s modest outperformance.

Platinum was set for a third daily gain, up 1.5 percent on the day at $1,483.99 an ounce.

The metal has been helped this week by reports of a high risk of power outages in South Africa, the world’s largest producer of platinum, where both planned and unplanned maintenance are expected to disrupt electricity supply.

Palladium was up 0.4 percent on the day at $636.00 an ounce.