Gold gained on Tuesday as a weak US dollar spurred buying from bargain hunters and helped the metal defy selling pressure from falling crude oil and shares. Spot gold rose to $827.20/828.00 from $824.70/825.40 late in New York on Monday, when it hit a two-week high of $836.70 before credit market fears sparked selling from investors who covered margin calls on losses in stock markets.
Even though gold is seen as a safe-haven in times of turmoil, it sometimes behaves much like other assets. US stock market indices dropped by around 2 percent on Monday on worries that rising mortgage defaults and credit market losses will drag on the economy.
"There are bargain hunters buying at the low. Some guys have done short selling around $830 and they cover back," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong. Bullion traders will continue to keep an eye on stock markets, particularly the Dow Jones Industrial average, and prices may trade in a wide range of $820 to $830 on Tuesday, said Leung.
The key October 2008 contract on the Tokyo Commodity Exchange hit intraday low of 2,871 yen per gram before bouncing to 2,913 yen on bargain hunting, up 7 yen from Monday's closse. US crude oil futures fell by $1 to $96.70 a barrel on expectations that Opec may increase output and following a decline in US shares.
In theory, weaker oil reduces golds appeal as a hedge against inflation. The dollar was firmer at 108.54 yen but hovered near 107.22 yen hit in late New York trade on Monday, its lowest since June 2005.
The euro was steady around $1.4875 within sight of a record high of $1.4968 touched late last week. The dollar was under pressure after more signs that financial institutions are suffering from credit problems kept expectations high that US interest rates will soon head lower.
In the latest sign of trouble in the credit market, UBS downgraded home financing providers Freddie Mac and Fannie Mae to neutral, citing increased mortgage losses and erosion of other home-loans investments. Tokyos Nikkei average fell 0.22 percent, while MSCIs measure of other Asia Pacific stocks slid 0.79 percent, paring back most of Mondays 3.3 percent rally.
Dealers said golds rebound since falling to its lowest level in nearly a month at $772.60 on November 20 suggested the metal was still on track to test the highs again.
Gold rallied to $845.40 on November 7, its best level since January 1980 when it a record high of $850 an ounce. "If the dollar extends its weakness, then gold could probably head past the recent peak of $845. Sustainability above $817 would add to the upward thrust towards the recent highs," said Pradeep Unni, analyst at Vision Commodities in Dubai.
"Strike plans by South Africas biggest miners union on December 4, 2007 against mounting mine deaths could add to the already persisting demand push in gold," he said. South Africa is the world's largest gold and platinum producer. Platinum rose to $1,470/1,475 an ounce from $1,467/1,472 in New York due to lingering supply concerns and held near a record high of $1,486 hit on Monday.
Traders said news of another fatal accident at South Africas Aquarius Platinum could make union workers more determined to strike until safety measures were improved. Investors growing interest in platinum can be seen in the exchange-traded market, where Zurich Cantonal Bank said its platinum holdings had doubled since May too more than 54,000 ounces.
Palladium was little changed at $353/357 an ounce from $353/358 in New York. Silver fell to $14.71/14.76 an ounce from $14.77/14.82 late in New York. Comex gold futures rebounded. The most active December contract was trading up $1.1 an ounce at $827.6.