Comex gold and silver futures both rallied on Wednesday, closing with strong gains, as the dollar weakened the Federal Reserve's decision to keep US interest rates steady while oil jumped on a drop in energy inventories, traders said.
A weaker dollar provides an advantage to overseas buyers of dollar-denominated gold, and the inflationary implications from higher oil prices also tend to boost gold purchases.
"To highlight how dangerous it is to be short in this market, we had the oil price very strong. People are looking at the BP pipeline shutdown in Alaska and the drop in oil inventory data.
Those combinations are going to provide some support to the oil price, which is inflationary," said Bernard Hunter, director of precious metals marketing, at ScotiaMocatta in Toronto.
December delivery gold closed up $4.70 at $665.30 an ounce at the New York Mercantile Exchange's Comex division. It traded in a range between $646.30 to $666.50.
Hunter added that dollar weakness and the decision by the Israeli government to expand its war effort in Lebanon added to gold's rise. "I don't know that it had a direct effect, but it's certainly one of those underlying geopolitical issues that the market looks at," he said.
Overall, traders said, there remains a slew of supportive factors for the gold market. And while slow summer trading conditions prevail, any one of a number of geopolitical or economic factors have the chance to boost prices.
"Gold traders remain a bit nervous, which results in reactions to the upside more than the downside when anything comes out.
You many not see people rushing out to buy on the news, but you certainly don't want to be short," Hunter said. He said attempts to square positions can often drive prices up because a short-term player may need to pay up to find someone to sell to them.
Gold and silver prices added to gains when a report showed strong oil demand in the week ended August 4 caused a decline in US gasoline supplies and pushed oil prices up.
Precious metals prices were already strengthened by dollar weakness after the Federal Reserve's latest decision to keep US interest rates on hold at its meeting on Tuesday, ending its two-year monetary tightening cycle.
Since June 2004, the Fed has raised the overnight interest rate from 1 percent to 5.25 percent, which lifted the dollar's yield advantage over other currencies.
By the end, Comex September silver had surged 31.0 cents to $12.57 an ounce, and set a high at $12.6650. Spot silver raced up to $12.54/12.59 an ounce, from $12.23/28 previously.
On Tuesday's fix was at $12.2650. Spot gold charged up to $649.50/651.00 an ounce, from Tuesday's late New York quote at $$645.50/6.25. On Wednesday's late bullion fix in London reached $649. Nymex October platinum rose $7.0 to $1,263 an ounce. Spot platinum last fetched $1,248/1,253. September palladium gained $2.95 to $326.70 an ounce. Spot palladium hit $322/327.