Gold eases on rescue hopes

Bullion initially rose in early trading on Friday after falling sharply from above $900 per ounce late the previous day, but the precious metal lost ground as traders adjusted positions ahead of the weekend after massive flight-to-quality buying boosted prices this week.

Wall Street stocks jumped late on Thursday on news that Washington was considering a more comprehensive solution to the mounting financial crisis, news that sent gold tumbling from a peak above $900 an ounce, its highest since August 4.

Spot gold was trading at $842.10 per ounce by 04:00 GMT, down $5.15c or 0.6% from Thursday's nominal New York close of $847.25.

"Gold is clearly overshooting so we are seeing some selling now, although the credit crisis is not over, so investors will continue to seek safety from gold," said a senior trader at a Japanse trading house.

Traders said investors from emerging markets, including Russia and India, have been selling US Treasuries amid fears of more trouble for the US financial sector and have been using the proceeds from Treasuries to buy gold.

This week, US authorities bailed out insurer American International Group with an $85bn rescue plan, Lehman Brothers collapsed and Merrill Lynch got bought.

"Emerging market players hold large cash in their hands by selling Treasuries," the trader said.

"I'm sure they have to cover losses in their own equity markets, but they also need to allocate the remaining funds to somewhere and that money is shifting to gold."

On Thursday prices soared as high as $902.60 on safe-haven buying fuelled by fears that the financial crisis had not yet run its course, but profit-taking kicked in late in the day as the dollar erased losses and stocks rallied.

Rising US equities and liquidity injection into the money market by central banks, including the US Federal Reserve, the European Central Bank and the Bank of Japan, also tempered gains.

US Treasury Secretary Henry Paulson said on Thursday night that he and congressional leaders were working on a plan to "address systemic risks" in the US capital market, with a proposal expected in a matter of hours.

Safe-haven rush

That news, coupled with UK efforts to curb short selling of banks and news that No. 2 investment bank Morgan Stanley was in advanced talks to be bought by Wachovia, helped stem the rush toward safe-haven assets, but investors remained anxious.

"Caution still stays and flight-to-quality buying in gold is continuing," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo.

"But considering the speed of the rise, we could see some technical correction, but on price dips there are plenty of demand from end-users."

Spot gold surged by more than 10% or around $90, its biggest one-day amount on record, on Wednesday and looked set to nearly repeat that feat on Thursday until the late sell-off.

Kageyama said strong buying from investors in the Middle East and Asia was detected when the cash price was below $800 and solid demand for gold exchange traded funds (ETFs) around $850.

COMEX gold futures, which settled before the late-day retreat in the spot market, dropped after rising 5.5% on Thursday. The most active December contract was trading down $50.8 or 5.7% at $846.2 from the New York settlement.

Benchmark August 2009 Tokyo Commodity Exchange (TOCOM) gold futures was up 2.7% or ¥76 at ¥2 884 from Thursday when they were pegged at ¥2 808 throughout the day after rising by the daily ¥150 limit.

"The credit crisis won't go away easily, so we expect funds to continue flowing into gold," Kageyama said.

"But the situation for other precious metals is different and especially for platinum. The market is very concerned about the demand outlook."

Spot platinum fell 2.2% or $23.50 to $1 065.50 per ounce from late New York, having dipped on Tuesday to a two and a half year low of $1 042 on weakening auto sales and car makers slashing their production plans.

- Reuters