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Fri 9 Nov 2012 04:09 PM

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Gold hits three-week high on US fiscal fears

Investors worry that Washington may struggle to find compromise on US budget cuts

Gold hits three-week high on US fiscal fears
gold, commodities

Gold hit a three-week high on Friday, boosted by expectations US monetary policy would remain loose after President Barack Obama's re-election and a looming "fiscal cliff" that could slash US public spending.

Since the US elections on Tuesday investors have become worried that Washington's politicians may struggle to find a compromise to cut the budget deficit before nearly $600bn worth of spending cuts and tax increases kick in early in 2013.

Markets are also watching the debt ceiling, which needs to be raised to avoid a government shutdown.

Spot gold was at $1,732.09 an ounce by 3.50pm UAE time, up 0.12 percent, having earlier touched a three-week peak of $1,737.60, while US gold edged up 0.39 percent to $1,732.70.

A stronger dollar offset further upside in gold by making the yellow metal more costly in other currencies.

Gold prices hit a two and a half week high on Wednesday after Obama's re-election gave markets a boost by ending weeks of political uncertainty, and since extended gains to the three-week peak as concerns over the fiscal cliff intensified.

"This is a question of a safe haven bid for gold in times of economic uncertainty," said Nic Brown, head of commodities research at Natixis.

"It is a recognition that the negotiations between Obama and Congress will be difficult. The two political parties come from diametrically opposed positions on this issue."

Brown said the Obama victory signalled a continuing environment of relaxed monetary policy, which was likely to underpin gold prices.

"An Obama victory enhances the likely longevity of ongoing quantitative easing," he said.

Money printing by central banks boosts gold's appeal as it keeps interest rates at a low level, reducing the opportunity cost of holding a metal that has no yield outside its actual value.

Spot gold is likely to gain more to $1,749 per ounce, driven by an upward wave c, according to Reuters market analyst Wang Tao.

China's economy strode further along the road of recovery from its slowest growth in three years, data for October showed on Friday, as infrastructure investment accelerated and output from the country's factories ran at its fastest in five months.

China's gold demand is expected to grow 1 percent this year to a record of around 860 tonnes, Philip Klapwijk, the global head of metals at consultancy Thomson Reuters, said this week, with both jewellery and investment sales rising.

Gold importers in India, the world's biggest buyer of bullion, paused on fresh purchases ahead of festivals next week, as a weaker rupee helped the yellow metal hit its highest level in seven weeks.

The festive season in India will peak with Dhanteras and Diwali, while the wedding season continues until December.

Spot platinum traded up 0.86 percent to $1,553.99 an ounce. Spot palladium was down 0.08 percent to $611.47 an ounce. Silver fell 0.37 percent to $32.2 an ounce.

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