Europe drives investors to gold

By Susan Thomas

LONDON — Gold rose more than 1% on Monday as investors piled into the traditional safe haven asset as Europe’s debt crisis intensified on concerns about political instability in Italy and Greece.

Worries about Italy, where Prime Minister Silvio Berlusconi is battling party rebels threatening to bring down his government, have overshadowed a coalition deal in Greece to help secure its latest bailout package.

With Italy’s debt levels at 120% of GDP, the debt problems of the eurozone’s third-largest economy would pose a much bigger risk to the financial markets than Greece.

Spot gold touched an intraday high of US$1,775.04, its highest since Sept. 22, before easing to US$1,772.29 by 1207 GMT, according to Thomson Reuters data.

U.S. gold rose to US$1,777.20, also its highest in six and a half weeks, before giving up some gains to trade at US$1,775.60.

“The European issue is still very prominently there. So as long as that remains the case gold is going to remain firm,” said Ross Norman of Sharps Pixley.

“But even aside from that, there is a general fear factor at the moment. Clearly there is a lot of fear in the system and gold is doing what it should do.”

The CBOE Volatility Index, sometimes known as the fear index, fell 1.1% to close at 30.16 on Friday, although it is still up from near 20 in early August.

Investors fear that a disorderly default of an EU sovereign would trigger losses in creditor banks that could ricochet around the global financial system much in the same way the bankruptcy of Lehman brothers hit markets in 2008.

Italy’s borrowing costs have been rising sharply over the past several weeks.

Italian 10-year government bond yields hit 14-year highs of around 6.59% on Monday, lifting their yield premium over benchmark German Bunds to their highest since 1995.

“The issue, which people are very focussed on at the moment are the Italian senior bond rates,” said Norman. “When the Greeks got to 7% they ran up the (white) flag. With Italy at 6.6, we’re getting very close to the line.”

The MF Global bankruptcy and its aftermath also depressed activity in markets, traders said.

Money managers, including hedge funds and other large speculators, raised their bullish bets in gold futures and options in the week to Nov. 1 as the price of bullion surged to its highest in five weeks, above US$1,750 an ounce, data on Friday showed.

A surprise interest rate cut by the European Central Bank last Thursday also helped gold to post its second consecutive weekly gain last week.

“We still believe that precious metals are currently the commodity sector with the best prospects,” Credit Suisse said in a note. “Precious metals tend to perform best when interest rates are low and falling. As a result, the ECB rate cut should help the sector.”

Investors will watch this week for China’s inflation numbers, due on Wednesday. Annual inflation is expected to ease to 5.5% in October.

“Somewhat counter-intuitively we think that lower inflation numbers would be supportive for gold, as lower inflation would give the Chinese central bank more room to manoeuvre and fine tune monetary policy as announced previously,” Credit Suisse said.

Holdings of the SPDR Gold Trust (GLD), the world’s biggest gold-backed exchange-traded fund, gained 1.513 tonnes on the day to 1,245.064 tonnes by Nov. 4, the highest in more than a month.

Gold prices have found good support on the downside from physical demand with interest emerging from the festival season in India as well as China, though volumes have slowed, Barclays Capital said in a research note.

Silver was up 1.1% at US$34.48 from US$34.10, platinum was US$1,634.74 from US$1,630.16, and palladium was US$655.47 from US$651.28.

© Thomson Reuters 2011