Stimulus Hopes Boost Gold

by on July 25, 2012 11:40 pm BST

NEW YORK—Gold futures finished above $1,600 an ounce for the first time in more than two weeks as some traders bet that a deteriorating global growth outlook would compel the Federal Reserve to try to stimulate economic activity.

Wednesday’s economic data provided fresh evidence that the world’s economy continues to struggle. In the U.K, second-quarter gross domestic product contracted by 0.7%, the most since 2009, and, in Germany, a closely watched gauge of business confidence, the Ifo Index, fell to its lowest level since March 2010. In the U.S., June sales of newly built homes hit a five-month low, falling 8.4% from May to a seasonally adjusted annual rate of 350,000.

Bloomberg News

Gold futures ended above $1,600 an ounce on Wednesday.

“It seems like growth everywhere is deteriorating right now,” said Bob Haberkorn, senior commodities broker with RJO Futures. “The gold market thinks you’re probably going to see the Fed’s hand forced.”

Media reports this week pointed to the chance that sluggish U.S. growth may prompt the Fed to take action at its policy-making meeting next week.

Monetary easing from the central bank—essentially making more money available to lower lending costs and spur growth—tends to drive down the value of the U.S. dollar. Easing also can raise the prospect of inflation down the line, stoking demand for gold as a hedge against rising prices.

The most-actively traded gold contract, for August delivery, rose $31.90, or 2%, to settle at $1,608.10 a troy ounce on the Comex division of the New York Mercantile Exchange, the highest settlement price since July 5.

The front-month July contract rose $32, or 2%, to settle at $1,608 a troy ounce.

Gold futures surged earlier this year, nearing $1,800 an ounce on the view that the Fed would implement another round of easing. But the central bank disappointed gold bulls by largely holding to previously disclosed policies. Meanwhile, investors’ concerns about Europe’s debt crisis pushed the dollar sharply higher, weighing on gold. The metal tends to move inversely to the U.S. currency, as a falling dollar makes gold cheaper for purchasers using other currencies.

Given that precious metals have struggled to draw buyers this year despite a full slate of economic worries, stimulus hopes are “all that gold has going for it at this time,” said Ira Epstein, director of the Ira Epstein division of the Linn Group.

Gold’s gains Wednesday also came as investors shifted their positions ahead of Thursday’s expiration of August options contracts, traders said.

Ahead of the expiration of monthly options on Comex, gold can gravitate toward round numbers, such as $1,600 a troy ounce. Such marks correspond to the vast majority of the outstanding contracts. Thousands of those options become worthless after Thursday if futures are below $1,600.

Some traders try to swing the market in their favor, while others try to take advantage of those moves for quick intraday gains.

August futures spent the bulk of the New York trading day within $5 of $1,600.

Settlements (ranges include open-outcry and electronic trading):

London PM Gold Fix: $1,601.00; previous PM $1,583.25

August gold: $1,608.10, up $31.90; Range $1,577.90-$1,610.00

May silver: $27.466, up 65.5 cents; Range $26.780-$27.520

October platinum: $1,399.40, up $12.80; Range $1,383.30-$1,407.00

September palladium: $565.25, up $3.65; Range $561.00-$569.00

Write to Matt Day at matt.day@dowjones.com