Gold Rises 2 Percent on Safe-Haven Bids

Gold turn sharply higher Thursday on the back of flight-to-quality buying despite a strong dollar, but weak physical bullion demand could still cap recent gains below $900 an ounce.

"I think that the flight to quality has triggered purchases of gold and dollar simultaneously," said James Steel, chief commodities analyst of HSBC .

Bullion and the U.S. currency had previously traded in tandem in times of wars and enduring economic crises, Steel said. However, signs of weak physical demand could limit gains and keep prices below $900 an ounce, he added.

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A stronger dollar typically weighs on gold, which is often bought as a currency hedge, but the relationship has decoupled in recent sessions as both benefited from safe-haven type of buying.

"That is a very long-standing relationship," said Citi analyst David Thurtell. "I would be surprised to see it break down." He said a rise above $888 would set the metal up for further gains.

Spot gold was at $906.30 an ounce this afternoon, up 2.3 percent from the last trade $885.60 on Wednesday in New York.

U.S. gold futures for April delivery settled up $16.50, or 1.9 percent, at $906.50 an ounce on the COMEX division of the New York Mercantile Exchange.

The dollar and yen rose broadly as bleak U.S. economic data and falling share prices kept investors wary of risk even as countries embraced more monetary and fiscal stimulus to boost growth.

The precious metal has fallen 4 percent this week from the three-month high of $915.30 it hit on Monday. Prices eased on Wednesday as the Chicago Board Options Exchange Volatility index -- Wall Street's so-called fear gauge -- fell.

"We decoupled from the currencies, the S&P. There is a lot of interest in the gold as an accepted safe-haven entity," said Mihir Dange, a COMEX gold floor trader.

Worries about deflation also weighed on gold due to uncertainties about whether the stimulus plan by U.S. President Barack Obama could save the economy from a prolonged recession.

Plunge

Weakness in gold demand from traditional centers of jewelry buying, such as India, the Middle East and China, was also worrying traders, analysts said.

India's gold imports plunged by more than 90 percent to 1.2 tonnes in January, the Bombay Bullion Association said on Thursday, due to high prices and ample stocks.

Demand for gold has been buoyed by investment in bullion-backed products such as exchange-traded funds.

The world's largest gold ETF, the SPDR Gold Trust, saw strong inflows last week that took it to record levels, but its holdings have been steady for the last three sessions.

Meanwhile at the World Economic Forum in Davos, Peter Munk, head of the world's biggest gold miner Barrick Gold , said he thought gold prices were likely to hit new highs this year as the dollar weakened.

Interest in gold as a safe haven is still expected to boost investment demand this year, keeping prices steady in the face of the global downturn that is expected to pressure other commodities.

Among other precious metals, silver was at $12.16 an ounce, up 1.8 percent from its previous close of $11.95.

Demand for silver ETFs has also been strong, with holdings of the largest, New York's iShares Silver Trust, up 10 percent or 660 tonnes since Jan 1.

Platinum was at $964.00 an ounce, up 1.1 percent from its last finish of $953.50 and palladium was at $189.50 an ounce, up 0.8 percent from its previous close $188 on Wednesday.

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