Gold Gains in London as Weaker Dollar Spurs Demand for Safety

By Marianne Stigset

Oct. 1 (Bloomberg) -- Gold rose in London as a weakening dollar and speculation of a deepening global financial crisis increased the metal's allure as an alternative asset.

The dollar fell from close to a two-week high against the euro on speculation the U.S. economy will enter a recession regardless of whether Congress approves the Bush administration's $700 billion bank-bailout proposals. Gold has a correlation of 0.67 to the euro-dollar exchange rate this year, up from 0.58 last year, Bloomberg data show. A figure of 1 would mean the two move in lockstep.

``You wouldn't want to give up gold if you had it,'' said Mario Innecco, a futures broker at MF Global Ltd. in London. ``Things are not well.''

Gold for immediate delivery climbed $5.55, or almost 0.6 percent, to $876.50 an ounce as of 12:28 p.m. in London. Futures for December gained 80 cents, or 0.1 percent, to $881.60 in electronic trading on the Comex division of the New York Mercantile Exchange.

``Gold is an indication of how things are going and central banks are trying to put some ice on the thermometer,'' keeping gold prices down, Innecco said. ``Eventually it will burst out and go up to $1,000 an ounce quite easily.''

Gold fell to $876 an ounce in the morning ``fixing'' in London, used by some mining companies to sell production, from $884.5 at the previous afternoon fixing.

Senate leaders vowed yesterday to revive a bill to buy distressed assets from banks. The legislation was rejected two days ago by the House of Representatives.

Global financial institutions have posted $590 billion of losses and writedowns since the start of last year following the collapse of the U.S. subprime-mortgage market. The losses led to a credit squeeze that caused banks including Lehman Brothers Holdings Inc. and Washington Mutual Inc. to fail last month.

Not Enough

Gold refineries can't make enough bars to keep up with demand from investors, the Financial Times reported today, citing Jeremy Charles, chairman of the London Bullion Market Association.

The situation is unprecedented in Charles's 33-year career, the newspaper reported him as saying. Some investors are paying $25 an ounce above the spot price to get bars, the FT cited an unidentified banker at an LBMA meeting in Japan as saying.

``To buy gold now you would have to pay a lot more than the price you see on your screen,'' Innecco said. ``More and more people are buying gold coins and bars.''

Interbank Rates

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, advanced almost 3.1 tons to a record 755.3 tons yesterday, according to figures on the company's Web site. That would rank the fund eighth worldwide when compared with central bank holdings, according to data from the World Gold Council.

``With interbank rates continuing to rise to new record levels, systemic risk remains elevated which will support gold,'' brokerage Gold and Silver Investments Ltd. in Dublin said in a report today.

Banks are being squeezed because of a surge in borrowing costs as lenders hoard cash on concern more financial institutions will fail. The euro interbank offered rate, or Euribor, for one-month loans rose to a record 5.09 percent today. The London interbank offered rate, or Libor, for overnight dollar loans climbed to an all-time high of 6.88 percent yesterday.

Platinum for immediate delivery gained $17, or 1.7 percent, to $1,028 an ounce in London, rebounding from yesterday's 2 1/2- year low.

``Platinum was hammered yesterday,'' Manqoba Madinane, a commodity analyst at Standard Bank Group Ltd. in Johannesburg, said in a report. ``With bargain hunters roaming, technical signals should dominate today and we expect some gains.''

Among other metals for immediate delivery, silver rose 30 cents, or 2.5 percent, to $12.33 an ounce and palladium climbed $5.5, or 2.8 percent, to $205 an ounce.

Platinum rose to $1,040 an ounce in the morning fixing in London from $1,004 at the previous afternoon fixing. Palladium gained to $207 an ounce, from $199.

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net