Gold posts historic gains on flight to safety
Wed Sep 17, 2008 5:08pm EDT
By Frank Tang and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold posted a record one-day gain in absolute dollar terms on Wednesday, hitting a near six-week high with investors fleeing to safety as they watched the carnage on stock markets and expected further losses.
Silver tracked gold higher to record its biggest one-day rise in percentage terms since 1995.
Losses in U.S. investment banking stocks and doubts over the government's bailout of insurer American International Group have fueled fears over the outlook for the financial sector.
Sliding U.S. equity markets and worries about the financial outlook have sparked a flight to "safer" assets, such as bullion, analysts said.
"It's unbelievable, simply unbelievable, what is happening," said Eugen Weinberg, commodities analyst at Commerzbank.
"Investors are insecure and going into gold. There is safe-haven buying from all over the world."
Spot gold rose more than 10 percent to $866.10 an ounce at 2:55 p.m. (1455 GMT) by New York's last quote, up sharply from Tuesday's nominal U.S. market close of $777.55.
"It looks like (gold) has finally found its safe-haven bid," said Standard Chartered head of commodity research Helen Henton.
Gold prices were reacting to deepening fears over the outlook for U.S. investment banks and concerns over the government's rescue plan for AIG, which have sparked fresh buying of commodities.
U.S. gold futures for December delivery settled up $70.00, or 9 percent, at $850.50 an ounce on the COMEX division of the New York Mercantile Exchange. In after-hours electronic trading, gold scaled a high of $872.90, its highest level since August 8.
The U.S. Federal Reserve said in a statement it would extend American International Group $85 billion in exchange for a nearly 80 percent stake to bail it out.
"The AIG situation, rather than calming the waters, created concerns of how many other AIGs are out there," said Bill O'Neill, managing partner of New Jersey-based LOGIC Advisors.
Investment banking shares are also suffering, as Lehman Brothers' insolvency earlier this week raises questions about the future of the sector.
FALLING BANK STOCKS
Shares in Wall Street banks Morgan Stanley and Goldman Sachs plummeted as worries over the outlook for the financial sector multiplied, sparking a rise in oil and gold prices.
Elsewhere, the Reserve Primary Fund, a money market mutual fund whose assets have fallen 65 percent in recent weeks, fell below $1 a share in net asset value due to losses on debt issued to Lehman Brothers.
"It's the oldest money market funds in the United States. Money market funds aren't supposed to lose money, " Weinberg said.
A spike in interbank lending rates in the United States has added to worry about the global financial system. U.S. stocks slid 2 percent. As financial worries spread, Russia halted stock and bond trading in a response to the worst market falls since 1998.
With the problems facing investment banks likely to worsen, gold could post further gains as the flight to safety gains strength, analysts said.
"As long as the turmoil in the financial markets continues, and as long as the banks distrust each other... the preference for safe-haven assets is definitely going to continue," said Dresdner Kleinwort consultant Peter Fertig.
Precious metals consultancy GFMS said in a report that investment demand was expected to drive gold prices "well above" $900 an ounce in the fourth quarter as the dollar slips and the outlook for the financial sector worsens.
Silver meanwhile tracked gold higher, soaring to a high of $12.02 an ounce and was last quoted at $11.90/12.00 an ounce.
Among other precious metals, spot platinum traded at $1,102.00/1,132.00 per ounce, up from Tuesday's close in New York.
Spot palladium was last quoted at $239.50/249.50 an ounce, higher than its Tuesday close of $222.50/228.50.
(Additional reporting by Pratima Desai in London; Editing by Marguerita Choy)
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