A weakened dollar and a less volatile stock market drove US gold futures higher early on Wednesday, a day after the Federal Reserve said inflation is still its main concern. A major bullion dealer said that physical buying was robust as jewellers world-wide began stocking inventories for gold's high-demand season near the end of the year.
"It's mostly the dollar, which has been pretty well correlated with gold recently," said one precious metals dealer in New York. At 10:33 am EDT (1433 GMT), most-active gold for December delivery on the COMEX division of the New York Mercantile Exchange jumped $4.50 to $686.90 an ounce, after touching a high of $688, a near two-week high. Its low was $680.80. US stocks opened higher on Wednesday, extending Tuesday's solid gains, after the Fed reassured that the housing slump would not stall economic growth.
The US central bank on Tuesday said in its policy statement that while downside risks to growth had risen "somewhat," inflation remained its major concern.
"Any time the Fed mentions that (inflation), psychologically people start thinking again about gold as a hedge against inflation. It always attracts some interest into the market," the New York dealer said.
Andy Montano, a director of bullion dealer ScotiaMocatta in Toronto, cited a more positive equity market and the weaker dollar for gold's gains. "The level of physical demand that we are seeing is certainly encouraging," Montano said. "We are coming into the festival season. Now people are stocking inventory and getting ready for the festival season to kick off," he said.
Demand for bullion usually rises near the end of the year as jewellers around the world buy gold for India's wedding season, Muslim religious festivals, Christmas, and the Chinese New Year. In government gold sales, the Bank of Spain sold 0.8 million troy ounces (24.8 tonnes) of gold in July, data on the central bank's Web page showed, adding to a series of sales earlier this year.
In related news, Italy's prime minister, Romano Prodi, said on Wednesday he was pleased there was a discussion on possible sale of some of the country's gold reserves.
The Italian parliament passed a motion last week requiring the government to evaluate the possible use of some gold reserves to reduce the public debt. Italy is the world's fifth-largest holder of gold, after the United States, Germany, the IMF and France, with 2,451.8 tonnes. Gold, held by the central bank, accounts for 66 percent of the Bank of Italy's reserves, according to the World Gold Council.
For a factbox on European central bank gold sales, click within the brackets. Heavier-than-usual gold sales from central banks have already taken a toll on bullion investor sentiment and kept gold from rallying to retest the psychological $700 an ounce level.
Spot gold was quoted at $675.15/675.75 an ounce, compared with $672.10/672.90 late Tuesday. The London morning gold fix was $670.40. COMEX September silver rose 10.5 cents to $13.200 an ounce, trading between $13.050 and $13.250. Spot silver was quoted at $13.14/13.18 an ounce, compared with $13.05/13.10 late Tuesday. London silver was fixed at $13.03.
NYMEX October platinum was up $6.20 at $1,297.50 an ounce. Spot platinum fetched $1,284/1,288 an ounce. September palladium gained $1.55 to $365.10 an ounce. Spot palladium was quoted at $361/365 an ounce.