Gold rallies on euro debt crisis gloom

LONDON: Gold prices rallied on Monday after European policy makers failed to soothe fears of Greek default and contagion to other euro zone countries, prompting investors to seek refuge in the precious metal.

Spot gold was bid at $1,817.99 a troy ounce at 1033 GMT from $1,810.73 late in New York on Friday. The precious metal hit a record high of $1,920.30 on September 6.

However, a stronger US currency which makes dollar-denominated metals cheaper for holders of other currencies capped gold's price gains. It ranged between $1,827.36 and $1,810.73 an ounce.

The cancellation of a visit by Greek Prime Minister George Papandreou to the United States to chair an emergency cabinet meeting at home and a regional election defeat for German Chancellor Angela Merkel added to perceptions of a worsening crisis.

"Buying interest is picking up and given ongoing problems in the euro zone and the financial system, safe-haven demand should remain strong," said Carsten Fritsch, analyst at Commerzbank. "Last week's correction was just a short term brief downward move."

Spot gold hit a three-week low of $1,761.94 an ounce on Friday.

EU finance ministers at meetings ending on Saturday broke no new ground in dealing with the crisis and made no decision on whether to give more firepower to the 440-billion euro bailout fund as suggested by US Treasury Secretary Timothy Geithner.

Markets are expected to focus on a policy meeting of the US Federal Reserve on Tuesday and Wednesday. Any announcement of further stimulus for the economy could help buoy gold prices.

OPPORTUNITY COST

Gold prices are expected to hit $2,200 by 2012, supported by the economic uncertainties in Europe and the United States, said the chief executive of AngloGold Ashanti , the world's third-largest gold producer.

"The European sovereign debt crisis remains unresolved, underpinning investment demand, and we see an extended period of negative real interest rates," Morgan Stanley said in a note.

Low or negative interest rates mean there is no opportunity cost to holding gold as major currencies such as the dollar, yen or sterling yield little or nothing in interest.

The Federal Reserve, facing rising global financial strains and recession fears, is poised to increase downward pressure on longer-term interest rates next week in a bid to help the sputtering US recovery.

"Beyond near-term weakness, we remain positive on gold as uncertainty heightens over Europe and the near-term outlook for the US, as well financial market instability," Barclays Capital said in a note.

"(Gold's) downside has been cushioned by physical demand and looks to be increasingly supported amid the seasonally strong period for demand."

Analysts expect gold to be supported at $1,800 an ounce, a level at which Asian buyers have been seen returning to buy

Silver tracked gold higher. It was at $40.33 an ounce from $40.60 late on Friday.

Platinum was at $1,804.24 from $1,804.83 and palladium at $720.00 from $727.05 an ounce.

Platinum and palladium have recently come under pressure from expectations of weaker demand from the auto industry, which uses precious industrial metals to make catalytic converters.

Copyright Reuters, 2011