Gold hits 2-1/2 week high on euro zone jitters

Wednesday, 1 December 2010 00:15 - - {{hitsCtrl.values.hits}}

LONDON (Reuters) - Gold rallied 1.4 percent to a 2-1/2 week peak on Tuesday and euro-priced bullion set a fresh record high as concern over sovereign debt levels in the euro zone fuelled buying of the metal as a safe store of value.

A weekend rescue package for Ireland failed to assuage investor jitters over the spread of debt problems in the euro zone, analysts said.

Spot gold was bid at $1,384.00 an ounce at 1415 GMT, against $1,368.09 late in New York on Monday, having touched a high of $1,385.85. U.S. gold futures for December delivery rose $18.60 an ounce to $1,384.60.

The euro fell to its lowest in 11 weeks on Tuesday amid persistent concerns over the debt crisis in the euro zone. A consequently stronger dollar would usually weigh on gold, but in times of extreme risk aversion, both can benefit.

“A weaker euro equals increased worries, equals stronger gold and rocketing euro gold,” said Saxo Bank senior manager Ole Hansen. “It is testing a little bit of resistance here, but it shows how desperate the situation in Europe has become.”

Spanish and Italian government bond yields hit euro lifetime highs on Tuesday, hammered by concerns about the euro zone crisis, after an 85 billion Irish rescue deal failed to stop the rot in peripheral debt.

Meanwhile European shares extended losses in afternoon trade, with banks falling further on persistent worries over the financial health of the euro zone periphery.

Earlier the iTraxx SovX index of Western European credit default swap prices rose to an all-time high as the cost of protecting euro zone sovereign debt against default surged.

“Credit markets dismissed news of a definite bailout for Dublin with the broader market still reluctant to turn positive on the monetary union,” said VTB Capital in a note.

“Credit default swaps and sovereign yields spreads against the benchmark Bund have widened significantly in the past week, still near fresh highs for most peripheral member states in the euro zone.”

PHYSICAL DEMAND

Gold priced in euros meanwhile rose to a fresh record high at 1,067.93 euros an ounce, and was on track for its biggest monthly gain since May, when concerns over Portugal’s financial health first battered the markets.

Spot gold was also on course for a fourth consecutive month of gains, matching a similar winning run from November 2008. Physical buying in Asia remained supportive of gold prices.

“We’ve seen good physical demand from China and India, both from jewellers and investors,” said a Hong Kong-based dealer, citing premium for gold bars in Hong Kong at $1.20 to $1.50 above London prices.

The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust , said its holdings rose to 1,286.603 tonnes by Nov. 29 from 1,285.084 tonnes on Nov. 22.

The International Monetary Fund has slowed the rate of selling its gold by 40 percent in October from the previous month, as interest among central banks to own the metal as a hedge against economic uncertainty rose.

Meanwhile November gold imports by India -- the world’s biggest gold consumer -- are provisionally expected to be at 20-25 tonnes, below the Reuters forecast of 34 tonnes, the head of the Bombay Bullion Association said.

Among other precious metals, silver was at $27.54 an ounce against $27.12, platinum was at $1,654.74 an ounce against $1,643.24, and palladium at $702.22 against $689.