Gold rises two per cent as dollar weakens

Gold prices rose two per cent in Europe yesterday as the dollar turned lower against the euro after positive economic data from the euro zone, and amid speculation inflation may rise this year.

Strength in gold lifted other precious metals, with palladium climbing above $420 (Dh1,541) an ounce to its highest since July 2008, and platinum hitting a one-month peak.

Spot gold hit a peak of $1,118.70 an ounce and was bid at $1,117.70 an ounce at 1117 GMT, against $1,096.35 late in New York on Friday.

Analysts said the outlook for the precious metal was bright on speculation global monetary stimulus could lead to rising inflation later in 2010, raising the appeal of gold against currencies.

"Further upside in gold is expected, with all the uncertainty still out there," said Calyon metals analyst Robin Bhar. "Governments are still stimulating their economies and may be forced to continue doing so going into the second half."

"That [could lead] to further devaluation of paper currencies, and more importantly, it may now give rise to inflation," he added.

"We are seeing signs of that in the UK, and more so in the emerging economies like China,'' said Bhar.

Gold is often bought as a hedge against inflation. It also closely tracks the path of the dollar. Weakness in the U.S. unit boosts gold's appeal as an alternative asset, and makes dollar-priced commodities cheaper for other currency holders.

The euro reversed early losses to climb 0.5 per cent against the dollar as purchasing managers' surveys confirmed that euro zone manufacturing activity expanded at its fastest rate in 21 months in December. Other commodities also rose.

Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation. US gold futures for February delivery on the Comex division of the New York Mercantile Exchange rose $22.30 to $1,118.50 an ounce.

On the physical market, buying of gold exchange-traded funds was light at year-end, with the SPDR Gold Trust, the largest gold-backed ETF, reporting no change to its holdings on Friday, the last day of 2009.

The SPDR's holdings rose 45 per cent, or 353 tonnes, over 2009, it said. The amount of metal held to back the world's largest silver ETF, the iShares Silver Trust, climbed 40 per cent or 2,700 tonnes in the same period, it said.

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