A weaker dollar lifted gold prices on Friday, but investors kept an eye on credit market conditions that may make investors more averse to risk-taking. Platinum group metals (PGMs) were supported by the risk of supply disruptions in South Africa.
Gold rose as high as $656.20 an ounce and was at $653.30/653.90 by 1424 GMT, against $651.30/652.80 in New York on Thursday, when it dropped to a one-week low of $647.50. "Credit market concerns, stemming from the continuing fallout of the subprime mortgage market debacle, may once again be influencing gold prices," said James Steel, precious metals analyst at HSBC Bank.
"In such an atmosphere, we believe gold and other risky instruments will tend to decline. If more CDOs are auctioned with similar results, the gold market may decline further," he said in a note, referring to collateralised debt obligations.
The fate of two troubled hedge funds managed by Bear Stearns Cos. Inc was left in question after Merrill Lynch & Co Inc sold off some assets seized from the funds and three other banks closed out their positions with them.
The Bear Stearns funds once had over $20 billion of assets, but lost billions of dollars from bad bets on securities backed by subprime mortgages. Bear Stearns earlier this week proposed adding $1.5 billion of its capital to the funds as part of a broader restructuring plan, but many Wall Street firms have already headed for the exits.
So far the risks seem contained, but the fallout may be felt everywhere from leveraged buyouts, investment bank earnings and sales of CDOs. Those securities have pushed sales of corporate and housing-related debt to record highs in the past year.
Robin Bhar, metals analyst at UBS Investment Bank, said the credit market concerns were affecting gold. "If it could be contained within the overall financial system, then fine," he said, adding that nervousness in other markets might trigger more selling in gold.
Although gold is traditionally seen as a safe asset, investment funds tend to sell the metal along with other risky assets in their portfolios during financial market troubles to take refuge in safer assets such as government bonds.
A European metals trader said the dollar helped gold, but gains were capped by producer selling. He saw a trading range of $645-$665 in the next week. The dollar fell against the euro, while oil, which often influence gold, rose to trade above $70 a barrel.
Silver was up 1 cent at $13.09/13.13 an ounce, while palladium matched Thursday's six-week high of $375/378 before slipping to $372.50/377.50, against New York's $374/377.
Platinum rose to a two-week high of $1,302 an ounce before falling to $1,294/1,299, versus $1,288/1,292. "A strike in the PGM market could have a major implications on supply within the market as 75-80 percent of platinum supply is mined in South Africa," Neal R. Ryan, director of research at US-based Blanchard Economic Research Unit, said in a report.