Gold hits two-week high on renewed euro debt fears

NEW YORK Wed Jun 2, 2010 2:53am IST

A gold jewellery shop owner arranges ornaments at a counter in Kolkata May 27, 2010. REUTERS/Parth Sanyal

A gold jewellery shop owner arranges ornaments at a counter in Kolkata May 27, 2010.

Credit: Reuters/Parth Sanyal

NEW YORK (Reuters) - Gold rose toward $1,230 an ounce on Tuesday as investors bought the metal as a haven from debt problems in the euro zone, after the European Central Bank warned the region's banks may face a fresh wave of losses.

Spot gold was bid at $1,224.55 an ounce at 15:25 p.m. EDT, up from $1,214.20 late in New York on Friday. U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange closed $11.90 higher at $1,226.90 an ounce.

Earlier in the session, both gold bullion and COMEX gold futures reached their highest levels since May 18 despite dollar gains against the euro.

"That was certainly done on the back of the European Central Bank stating that euro zone banks might have to write off another 195 billion euros of loans. So what you're seeing once again is investors focusing on gold as that safe-haven asset or currency hedge," said David Meger, director of metals trading for Vision Financial Markets in Chicago.

The yellow metal was drawing support from concerns that sovereign debt problems in euro zone countries like Greece, Spain and Portugal may ultimately damage the wider economy.

"The macroeconomic problems in the global economy (are) primarily to do with massive debts of sovereign states," said Angelos Damaskos, chief executive officer of Sector Investment Managers Ltd.

"The only realistic solution to finance that kind of debt is to print a lot of money and deflate away from the debt. That would be inflationary in the short term," he added, which would give additional support to gold as an inflation hedge.

Investors who believed the world's main currencies -- the dollar, euro and pound -- were being undermined by sovereign debt concerns were looking for alternative assets.

"They will look at traditional stores of value such as gold," Damaskos said.

The ECB warned on Monday that euro zone banks face up to 195 billion euros ($236.9 billion) in a "second wave" of potential loan losses over the next 18 months due to the financial crisis.

The euro tumbled to a fresh four-year low against the dollar, because of fears the sovereign euro debt crisis was spreading to the banking system.

INVESTMENT DEMAND REMAINS

Investment demand for gold held steady, with holdings of the world's largest gold exchange-traded fund, New York's SPDR Gold Trust, still at a record 1,267.93 tonnes on Monday.

Sean Corrigan, chief investment strategist at Diapason Commodities Management, said he saw gold and to a lesser extent silver as "insurance policies" against wider market risk.

Silver futures reversed early losses to finish the session higher. In the spot market, the grey metal was bid at $18.43 an ounce compared with $18.49 late on Friday.

Platinum was quoted at $1,544.50 an ounce, below $1,558.50 previously, while palladium was lower at $456.50 against $465.10 last Friday.

On Tuesday, ETF Securities, the U.K. firm running the first U.S. platinum and palladium exchange-traded funds, said it issued additional shares in the two products, raising their combined value to $871 million.

(Additional reporting by Jan Harvey in London; editing by Jim Marshall)

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