Gold rises on economic optimism, open interest down

NEW YORK/LONDON: Gold rose modestly Thursday on optimism that Germany's vote to beef up the euro zone's bailout fund will avert that region's debt crisis.

Bullion stemmed this week's brutal correction after Federal Reserve Chairman Ben Bernanke hinted at new stimulus measures if inflationary pressures ease. Economic optimism was also fueled by a five-month low in US initial claims for jobless benefits.

Spot gold was up 0.3 percent at $1,612.50 an ounce by 3:21 p.m. EDT (1921 GMT).

US gold futures for December delivery settled down 80 cents at $1,617.30 an ounce, giving up earlier gains. Volume was lower than usual as some bullion traders were off for the Jewish New Year holiday.

Gold futures open interest -- a gauge of overall investor sentiment -- fell to a near two-year low after prices tumbled 9 percent in the past six sessions on a margin hike and heavy fund selling to cover losses in other markets.

"It strikes me that a lot of the weaker, more volatile longs have been cleared out," said James Steel, metals analyst at HSBC. "It looks like it's beginning to bottom out."

In the past eight sessions, COMEX gold's open interest has dropped by more than 50,000 lots, equivalent to 5 million ounces or over $8 billon at current prices.

"It's not anything out of the ordinary other than general, overall liquidation that you have seen in the last three or four sessions," said Frank McGhee, head precious metals trader of Integrated Brokerage Services LLC.

Bullion found support in news that Germany's lower house approved new powers for the European Financial Stability Facility (EFSF) and Bernanke's remarks that the central bank could ease monetary policy further if inflation or inflation expectations fall significantly..

"If Bernanke's comments mean anything, and if the passage of the expansion of the ESFS by the German government means anything, it means bids for gold rather than offers of it," said independent investor Dennis Gartman.

However, analysts said that gold and silver prices could fluctuate on persistent fears that European policymakers still lack a cohesive plan to solve the region's debt crisis.

PHYSICAL DEMAND STRONG

Physical gold demand in Asia has been extremely strong as prices retreated from record highs. Premiums for gold bars were the strongest since at least February in Singapore and Hong Kong and the highest in a year in India.

Meanwhile, holdings of gold-backed exchange-traded funds have remained relatively strong.

RBS analysts said in a note that the little movement in the ETFs suggested that the core bullion holders are not going to desert gold as an important risk hedge.

Silver was up 1.6 percent at $30.34 an ounce. Silver prices sustained hefty losses this month, plunging more than a quarter as support from higher gold prices evaporated.

Among platinum group metals, spot platinum was down 0.3 percent at $1,517.49 an ounce, and palladium climbed 0.2 percent to $617 an ounce.

Platinum retained its unprecedented discount to gold prices as buyers worried a more anemic economic environment would weigh on demand for industrial precious metals.

Copyright Reuters, 2011