Gold rallied to a near one-year high early on Monday with traders and analysts citing both fund buying and possible central bank demand as markets opened a new quarter against the backdrop of a weak dollar. The spot price of bullion peaked above the $1,790 an ounce level last seen in November 2011.
Dealers said a flurry of fund-related buying led to nearly 4.0 million ounces of gold changing hands on the US futures market in a matter of moments. Some suspected that central banks were also in the market, given the soft, long-term outlook for the dollar from stimulus action planned for economic recovery.
"When the dust settles, I wouldn't be surprised at all if we learn that central banks have been buying gold over the last couple of weeks" said Adrian Day of Adrian Day Asset Management in Annapolis, Maryland. Although demand for bullion fell 10 percent in the second quarter versus the first, the decline was partly offset by an acceleration in central bank buying, the World Gold Council said in a report in August. Bullion traded from below $1,530 an ounce to just above $1,680 in the second quarter, with the spot price declining 4 percent from the previous quarter. In the third quarter, it traded above $1,787, gaining nearly 11 percent.
In Monday's session, bullion peaked at $1,791.20, its highest since November 14 last year when it rose above $1,795. US gold futures' most-active contract, December, rose to above $1,794, its highest since February 29, when it crossed $1,800. It settled up 0.5 percent at $1,783.30.
Analysts said the futures market could take out the February peak in the next few sessions if risk appetite remained strong and the dollar weak. This week holds a number of risk events for markets, including the monthly report on US unemployment on Friday and a European Central Bank policy meeting. Monday's data showed US manufacturing expanded unexpectedly in September, for the first time since May, as new orders and employment picked up.
Gold is also expected to take its cue from the euro, which recovered from a three-week low against the dollar on Monday, analysts said. But the rally in the euro could fizzle with concerns running high about when, and not if, Spain would request a bailout in exchange for the ECB lowering its borrowing costs. As such, gold prices could also be volatile.
"You might see a print above $1,800, but above there, you will get the sellers coming in," said Robin Bhar, an analyst in London for Societe Generale. Gold priced in euros rose 0.2 percent on the day to 1,380.61 euros an ounce, having touched a record high earlier in the day at 1,386.38 euros. The euro price of gold has risen by nearly 14 percent this year.