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Weak Dollar Boosts Gold

Simon Constable

Gold futures rallied Tuesday on a weaker dollar and renewed buying interest from hedge funds.

April-dated bullion contracts added $2.60 to close at $658.70 an ounce on the Comex division of the Nymex. The PowerShares DB Gold(DGL) exchange-traded fund, which tracks the futures market, was also moving higher, up 0.7%.

The bullion ETFs, iShares Comex Gold Trust (IAU) and streetTracks Gold Shares (GLD), were gaining too, each recently ahead by 0.7%.

"Escalating oil prices are pressuring the U.S. dollar," writes Ashraf Laidi, chief foreign exchange analyst at CMC Markets in New York, in a market brief. The "rebound of the past three weeks raises risks that the U.S. consumer may grow constrained due to soaring fuel costs."

An extended period of reduced household spending would likely weaken the economy and bring closer the timing of any future interest rate cuts by the Federal Reserve, thus reducing the appetite for dollars by yield-seeking investors.

Gold tends to move inversely in value with the greenback. The dollar was recently buying 120.13 yen, down from 120.41 late Monday. One euro was buying $1.2981 vs. $1.2928 previously. Crude oil futures tacked on 14 cents to $58.88.

Also helping the rally was renewed buying interest from hedge funds wanting to establish new positions after bailing late last week, says George Gero, a vice president of global futures for RBC Capital Markets in New York.

Gero also notes some market participants are even choosing to buy deep out-of-the-money calls with April expiration dates. Open interest in calls struck at $750 and $800, now totals more than half a million ounces each.

In the official sector, the European Central Bank says it made a net sale of 39 million euros of gold and receivables, or about 2.4 tons last week. The transaction reflects selling by one member bank and purchases by another, and marks the second consecutive period that transactions involved at least one entity adding to gold inventories. As with last week, the buying component will no doubt boost spirits among the bulls.

Elsewhere, State Street says it saw net additions of $95 million for the Gold Shares ETF in January, bringing the total to a $9.6 billion currently, with holdings of about 459 tons of the yellow metal.

In the precious-metals patch, BMO Capital Markets dinged AngloGold Ashanti(AU) with a ratings downgrade to market perform from outperform. But shareholders kept their eyes on the rising metal prices and the stock was recently gaining 0.6%.

Shares of Newmont Mining(NEM) were up 0.2%, while Goldcorp(GG) was lifting 0.4%, and Harmony Gold(HMY) was bouncing 2.1%.

As for base metals, copper contracts rallied on the Comex, closing up 8 cents to $2.50 a pound.

Shares of diversified miners BHP(BHP) and Rio Tinto(RTP) were both rising, ahead by 1.4% and 1.3%, respectively, in recent action.