Gold rallies after U.S. credit warning knocks dollar

Gold rose toward a six-month high on Tuesday helped by weakness in the dollar after a warning from a ratings agency on US creditworthiness. There is also continued expectations that the Federal Reserve will employ fresh measures to stimulate the economy.

By Amanda Cooper
Tue Sep 11, 2012 8:19pm IST

(Reuters) - Gold rose towards six-month highs on Tuesday, helped by the weakness in the dollar after a warning from a ratings agency on U.S. creditworthiness and after holdings of the metal in exchange-traded products reached a record high.

The euro's rise towards four-month highs against the dollar has been fuelled in part by growing expectations the U.S. Federal Reserve will employ fresh measures to stimulate the economy, which in turn has encouraged investor demand for gold, which tends to profit from weakness in the U.S. currency.

Gold relies more heavily on shifts in the dollar and U.S. monetary policy for direction and the focus for the market is squarely on the Fed's next policy meeting that ends on Thursday.

The dollar sold off broadly after Moody's Investor Service warned the United States may lose its triple-A credit rating if next year's budget talks do not cut the country's level of debt relative to the size of the economy.

Spot gold was up 0.7 percent at $1,736.91 an ounce by 1015 EDT. The price has risen by 2.5 percent so far in September to trade at its highest in six months.

"The overwhelming consensus is in favor of more (quantitative easing) in a significant way. Let's assume that happens. Gold is going to go higher and $1,800 looks very likely in the short term, but partly because the inflation risks are higher than they were," Daniel Smith, an analyst at Standard Chartered, said.

"The dollar is always partly driving these things, so obviously the massive weakness has tended to lift everything ... Investors are still very keen on gold. That is the key thing, even though the moves are not as volatile as those that you see in things like silver," he said.

Economic growth and, specifically, job creation, have been patchy enough to warrant a signal from Fed policymakers that they could resort to buying bonds to subdue borrowing rates and free up the flow of credit through the financial system.

The Fed has employed this tactic, known as quantitative easing, on two occasions since late 2008 following the collapse of investment bank Lehman Brothers because of the subprime debt crisis.

Since the Fed indicated in the minutes of its late July meeting two weeks ago that it could initiate another bond-buying program, commodities have risen broadly.

The Reuters-Jefferies CRB index of 19 commodities .CRB has gained more than 2 percent to reach its highest level since late March. The rise in the gold price over this period has been driven largely by investors, rather than central banks or retail consumers.


Holdings of bullion in exchange-traded products, often used as a gauge of investor appetite for gold, rose by 91,932 ounces on the day to a record 72.49 million ounces, following broad-based inflows into most major ETPs.

Total holdings have risen by nearly 3.5 million ounces so far in 2012, of which 2.7 million ounces have flowed into ETPs in the last month alone, according to Reuters data, reflecting raised expectations of easier U.S. monetary policy.

"With a good portion of gold's recent strength accounted for by the sharp increase in spec positioning, this certainly raises concerns on the longevity of the move, especially with fundamental buying virtually out of the picture," Edel Tully, a strategist at UBS, said.

"But the fact that the (ETP) camp - a relatively less-fickle group of buyers - has also been giving gold its vote of confidence offsets some of those worries," she added.

Silver has been one of the top-performing commodities in September, with a rise of 6.5 percent so far this month, compared with leader palladium, which has gained 8 percent and with corn, which has lost 2.5 percent.

The gold/silver ratio, which measures the number of ounces of silver needed to buy one ounce of gold, has fallen to a five-month low of 51.4, from around 55 at the start of September, highlighting silver's outperformance.

Silver was up 1.4 percent on the day at $33.76 an ounce.

Platinum extended gains, rising by 1.1 percent to $1,606.99, after world number two producer Impala Platinum (IMPJ.J) said workers had demanded a second pay rise this year, the latest sign of labor unrest in the South African mining sector.

Platinum has risen by 15 percent in the last month, after a strike at world number three producer Lonmin (LMI.L) (LONJ.J) turned violent, leaving 44 dead and dozens injured, and shuttering the company's South African operations.

Palladium was up 1.9 percent at $675.22 an ounce.

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