Gold rose to its highest in more than seven weeks Wednesday, closing in on record highs as escalating unrest in Libya and soaring crude oil prices fueled fears of inflation and slower economic growth.
Wall Street fell sharply for a second day as investors sought safety in bonds, gold and the Swiss franc as thousands of Libyans celebrated the liberation of the eastern city of Benghazi from the rule of Muammar Gaddafi, who was reported to have sent a plane to bomb them as he clung to power.
Spot gold rose 0.7 per cent to $1,408.80 (U.S.) an ounce by 3:19 p.m. ET, after earlier hitting $1,416.30, its highest since Jan. 4. Bullion hit its lifetime high of around $1,430 on Dec. 7.
"This move in gold right now is acutely about the Middle East. The trade is about fear but people are viewing it as an extension of the inflation trade," said James Dailey, portfolio manager of the TEAM Asset Strategy Fund.
U.S. crude oil futures marched rapidly to hit $100 a barrel on possible supply disruption from Libya, stoking inflation concern. They later settled up nearly $3 at about $98 a barrel, the highest since October 2008.
U.S. gold futures for April delivery settled up $12.90 at $1,414.00 an ounce, with volume totaled about 30 per cent lower than the 30-day average, in line with lower-than-usual recent turnover.
On Tuesday, gold was sold off along with grains and industrial metals as the biggest decline on Wall Street since August triggered margin selling.
Open interest, a gauge of market liquidity, climbed 3 per cent to above 500,000 lots as of Tuesday for the first time since Jan. 21.
Gold has gained nearly 9 per cent since an intraday low of $1,308 on Jan. 28 on a combination of simmering geopolitical tensions, expectation of a low interest rate environment and renewed concern about a European sovereign debt crisis.
RISK AVERSION SPREADS
Earlier in the session, the gold market took heart as the dollar weakened after U.S. existing home sales data. The data showed a rise in home sales but a fall in house prices.
The broader markets showed widespread risk aversion. Stock markets retreated globally, while copper prices fell to their lowest levels in nearly a month as higher oil prices fanned concerns that inflation could slow global economic recovery, weighing on prospects for industrial metals. Prices in London reached their lowest level since late January at $9,365 per tonne.
Meanwhile, safe havens like German government bonds and the Swiss franc rose, with the Swissie at its highest point versus the dollar so far this year.
But while dealers reported strong demand for investment products like gold bars, interest in bullion-backed exchange traded funds softened.
The world's largest gold-backed ETF, the SPDR Gold Trust , said holdings dropped to 1,218.243 tonnes on Tuesday from 1,223.098 tonnes a day before.
Holdings in the world's largest silver ETF, the iShares Silver Trust , fell to 10,342.89 tonnes on Tuesday from 10,519.05 tonnes the previous day.
Silver rose 1.2 per cent to $33.45 an ounce. The metal has risen strongly this month on worries about tightness in the market, but metals consultancy GFMS said on Wednesday there was no need for concern about supply.
"We are expecting a reasonably robust increase (in new mine output) this year," Paul Walker, GFMS' chief executive officer, told Reuters in an interview. "The rise in mine output should keep silver still in a surplus."
Platinum dropped 0.5 per cent to $1,780.49 an ounce, while palladium lost 3.1 per cent at $777.50.