Gold, platinum rally on AIG rescue

AGNIESZKA FLAK

Reuters

September 17, 2008 at 7:06 AM EDT

LONDON — Gold climbed on Wednesday, in tandem with other commodities, as the U.S. Federal Reserve's rescue of troubled insurer American International Group (AIG) gave battered financial markets a bit of a respite.

“It's a breather, a temporary relief,” said a commodities analyst who prefered not to be named. “...It's just a matter of time before things will start heating up again.”

Bullion was lifted by hopes that more stable financial markets might help revive interest in beaten-down commodities and by the dollar's fall against the euro, even though a 1 per cent slump in the yen suggested limited demand for safer havens like gold.

Other precious metals jumped broadly, with spot platinum climbing more than 5 per cent to as high as $1,110 (U.S.) per ounce at one point after having dived 10 per cent on Tuesday.

Spot gold rose 0.6 per cent to $782.50 an ounce as of 1000 GMT from Tuesday's nominal close in New York, recovering from the previous day's $3 fall as risk-averse investors rushed to dump all commodities in a bid to reduce exposure to risk.

Gold has been whipsawed in recent weeks by rapidly shifting investor perceptions over whether it remains a safe-haven asset or whether it is part of a riskier commodities pool.

“Coupled with increasing upside potential for the greenback, high hedging costs could weigh down the metal today,” Standard Bank analyst Manqoba Madinane said in a note to clients, adding that increased risk and higher hedging costs were putting pressure on investors.

“High hedging costs could direct safe-haven investment flows into U.S. treasuries, which might mean a recovery for the greenback after the Fed held rates steady yesterday – this would increase precious metals' downside risks.”

The U.S. Federal Reserve said in a statement it would extend AIG $85-billion in exchange for a nearly 80 per cent stake to bail it out.

The Fed's move helped ease fears about a financial system crisis when Lehman Brothers filed for bankruptcy protection earlier in the week, traders said.

Deutsche Bank analyst Michael Blumenroth said the Fed's decision could raise inflation pressures and make gold more attractive to investors in the medium term.

“We might not see gold flying away in the next two to three weeks, but then it will be higher because of inflation hedges and safe-haven buying,” he said.

Platinum jumped more than 5 per cent on short covering, offsetting a near 10 per cent plunge the previous day.

But sentiment remained gloomy as many believe that the latest financial crisis in the United States could cause the global economy to slow further, crimping demand for the white metal, mainly used in autocatalysts, traders said.

Spot platinum was trading at $1,077.50/1,107.50 per ounce, up 2.7 per cent from Tuesday's close in New York. It struck a record high of $2,290 an ounce in March.

Spot palladium was trading just under half a per cent higher at $222/228 an ounce, after tumbling more than 5 per cent the previous day.

Spot silver gained 1.4 per cent at $10.59/10.65 from Tuesday's close of $10.44.