Gold climbs on flight-to-quality buying

By Chris Kelly and Jan Harvey

NEW YORK/LONDON (BestGrowthStock) – Gold gained over 1 percent on Monday, snapping five consecutive days of losses as lingering concerns over the fiscal health of the euro zone helped to restore the precious metal’s flight-to-quality status.

Stock markets slipped and the euro extended losses after the Spanish central bank’s takeover of a savings bank underlined structural problems facing fiscally fragile euro zone states.

“You have flight-to-quality buying today,” said Bill O’Neill, managing partner with LOGIC Advisors.

“The yen gained on the euro, the dollar gained on the euro, gold is up, and treasury yields are down again, so today is definitely a return to the flight to quality,” he said.

Spot gold was bid at $1,194.95 an ounce at 1804 GMT, against $1,175.15 late in New York on Friday. U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange ended up $17.90, or 1.5 percent, at $1,194 an ounce.

“The sovereign risk crisis in Europe is far from over, and I think that is going to continue to bode well for gold through the summer,” O’Neill said.

The euro slid against the dollar as investors cut risk in their portfolios after news the Bank of Spain was taking control of savings bank CajaSur.

A stronger dollar usually weighs on gold, but the traditionally strong inverse link between the two assets has weakened as both are benefiting from risk aversion.

“Traditionally, a weaker euro is negative for gold, but in this atmosphere, it is positive as it is a sign of increased risk,” said James Steel, chief commodity analyst at HSBC in New York.

Holdings of the main gold exchange-traded fund, the SPDR Gold Trust, remain at record levels, but new investments have slowed in recent days, reflecting the recent bout of increased risk and volatility in the market, Logic Advisors’ O’Neill said.

“It shows there is a high level of speculative participation,” he said.

GOLD TO BENEFIT

Euro-priced gold also rose 2.8 percent on Monday after tumbling 6 percent last week, despite hitting a record high of $1,012.81 euros an ounce on May 17.

“While Greece did trigger the EU/IMF rescue, we believe this is just the beginning of a new chapter in Greek tragedy with the contagion risk well intact,” said Bradley Yim, senior research analyst at Castlestone Management in a note.

“In our view, gold will continue to benefit from the combination of reaching a new high in euro terms, sliding global equities, the situation in Greece, the ECB’s reluctance to buy Greek bonds, and soaring demand for gold bars.”

While ETF holdings are near record levels, high prices have hurt jewelry demand.

Italian precious metal jewelry imports are thought to have declined 5 percent year on year in volume terms in the first two months of 2010, though they have risen 9 percent in the same period in value, the president of the Fiera di Vicenza jewelry trade show said on Saturday.

Other precious metals also recovered after last week’s hefty falls. Palladium, which tumbled as much as 25 percent last week from the previous Friday’s close to its lowest level since early February, climbed 4.5 percent in early trade.

In late trade, palladium was at $447 versus $433.50, off a high of $453, and platinum was at $1,529 versus $1,504.50.

UBS analyst Edel Tully said in a note that a report released by the U.S. Commodity Futures Trading Commission showed a sharp drop in interest in palladium in New York last week.

“Palladium was the heavy loser in the pack, with the NYMEX book falling 8.7 percent or 160,000 ounces. This represented the biggest one-week percentage decline since the week of Sept 29 last year,” she said.

Silver was bid at $17.98 an ounce against $17.59.

Stock Investing

(Additional reporting by Humeyra Pamuk; editing by James Jukwey, Sue Thomas and Jim Marshall)

Gold climbs on flight-to-quality buying