Gold climbs as investors seek safety

A flight to safety has helped the price of gold reach its highest level in just over a month.

Bullion rose $27 to $1,231 a troy ounce as equity markets around the globe sold off - the FTSE 100 in London closed 2 per cent lower - and the US dollar weakened. Silver was also in demand, rising 75 cents to $17.08 an ounce.

"Gold is now up . . . on account of continued equity weakness, particularly out of China, where stocks sold off by more than 5 per cent overnight as a round of overdue profit-taking set in," said Edward Meir of INTL FCStone, in a report.

Gold has rallied around 7 per cent since it hit a four-year low in early November. Analysts say one catalyst has been a rebound in coin and bar demand from retail investors, particularly in the US but also in India.

"The decline in price reinvigorated price-sensitive buying," said James Steel, an analyst at HSBC, noting silver coin demand had been "off the charts" since the price slipped below $16 at the end of November.

In addition to physical demand, sentiment towards gold has also improved in the wake of India's decision to scrap controversial restrictions on bullion imports that have triggered a spike in smuggling and crippled the country's jewellery industry. India accounts for around a quarter of global bullion demand.

Another factor for gold's recent advance has been investors closing bearish bets.

"Gold's resilience around $1,200 over the last three weeks has mostly been driven by short-covering, amplified by thin liquidity conditions," said analysts at UBS in a recent note.

After reaching a year high of 16.30m ounces in early November, gold gross shorts have declined by 1.50m oz per week, according to the bank. As of December 2, the short position stood at 11.80m ounces - the lowest level since the beginning of December.

"During this period, gold gross longs have increased by 1m ounces or 5 per cent.

This brings the net position to 10.47m ounces as of Tuesday last week, the highest level since October," UBS noted in the report.

However, analysts and traders said gold's move above $1,200 on Monday was down to equity market weakness.

"It hasn't been so much physical demand that has driven the gold prices in recent days but a risk off mentality that has benefited gold. That has provoked a flight into haven assets," said Mr Steel.

He said further gains for gold would depend on the performance of the US and the timing of interest rate rises by the US Federal Reserve. A stronger US dollar makes gold more expensive for holders of other currencies while higher rates reduce the attractiveness of bullion, a non-interest bearing asset.

"If the dollar remains strong it will eventually cap gold's rally," said Mr Steel.

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