Tuesday, October 25, 2011

Gold set for best three-day rise in a month

By Amanda Cooper


(Reuters) - Gold was set for a third consecutive daily rise on Tuesday, benefiting from growing investor optimism over the ability of European leaders to stem the spread of the debt crisis, which restricted gains in the U.S. dollar.

EU leaders are to meet on Wednesday with tentative plans in place for Greece's debt to be reduced, European banks to be recapitalized and the euro zone's EFSF rescue fund to be increased to provide partial insurance for sovereign bonds.

Uncertainty about just how close European Union leaders will come to solving the euro zone debt crisis kept many markets trading in a tight range on Tuesday and gold was no exception.

Implied volatility on gold options has fallen to its lowest in over two months this week, having spiked to a 2-1/2-year high in late September, when the price tumbled by as much as 20 percent from a record $1,920.30 an ounce.

Spot gold was last up 0.4 percent on the day at $1,658.40 an ounce, having risen by 2.5 percent over the last three trading days, its best three-day performance in a month, although this month, it has underperformed most major markets.

"At the moment, gold is rudderless, it is rootless and is looking for some direction and lead," said ANZ head of metal sales Peter Hillyard.

"With more turmoil, more uncertainty, the end of the fourth quarter and early into the new year, I believe the gold price will be higher based on what I think will be a failure to resolve, in a satisfactory way, all of the euro zone problems and so on ... at the moment, I would rather be long of gold than short of it," he added.


As some of gold's traditional correlations to other assets such as equities or base metals have broken down, the price has become more unpredictable.

Gold's performance over the last two weeks, in which time it has lost 0.4 percent, has been among the weakest of the major asset classes, having lagged against copper, European, U.S. and Chinese equities, as well as the trade-weighted euro, the dollar index and government bond futures.

Its correlation with European equities has reached its most positive in nearly six months, while its correlation with the copper price -- often viewed as a key indicator of investor risk appetite -- is at 70 percent, its highest in a year.

That said, longer-term investors are not deterred.

Holdings of metal in exchange-traded funds, often a measure of investor desire for physical bullion, staged their largest one-day rise since mid-September, following a net inflow of over 200,000 ounces, bringing total holdings to their highest in a month.

"The yellow metal is showing little independence at the moment and still moving in line with commodities and equity markets, albeit underperforming. We therefore do not expect any great price swings either in the wake of the EU summit on Wednesday," said Commerzbank in a note.

"Should a solution to the debt crisis be presented, gold will probably be pulled up slightly. Should expectations be disappointed, its character as a safe haven is likely to limit the downside potential."

Silver rose by 0.3 percent to $31.75 an ounce, on course for its third straight daily rise.

Options on U.S. silver futures expire on COMEX on Wednesday. Most open interest centers on put options -- which give the holder the right, but not the obligation to sell metal at a pre-determined price by that date -- at $32.00 an ounce and on call options -- which give the holder the right but not the obligation to buy metal -- at $31.00.

Platinum was up by 0.8 percent at $1,550.49 an ounce, also having risen for three days in a row, marking its largest three-day gain since mid-August.

Platinum has fallen by more than 12 percent this year, as concern has grown about the impact to car demand, particularly in Europe, from the euro zone debt crisis. Europe is home to the world's largest market for diesel-fueled vehicles, which require a higher loading of platinum in their catalytic converters.

Platinum has had some fundamental support in the last week from import and export data from key trading centers.

Customs data from Switzerland, a major clearing hub for both platinum and palladium, showed exports rose to their highest in three months in September, while customs data from China, a key consumer of metal for jewelry, showed imports nearly doubled year-on-year last month to hit their highest in six months.

Palladium was last up 0.1 percent on the day at $636.47.

(Reporting by Amanda Cooper; editing by Keiron Henderson)

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