Gold futures climb another $30

By Steve Goldstein, MarketWatch

Last update: 4:48 a.m. EDT Sept. 18, 2008

After a $70 rally on Wednesday, gold futures rose $32.90 to $883.40 an ounce in electronic action.

"We have been surprised that gold has been so heretofore quiet, and have expected a much stronger and more immediate response to the government takeover of GSE/mortgage and insurance entities, and broker-dealer bankruptcies," said John Hill, an analyst at Citigroup, in a note to clients.

"It is notable that the hard-core goldbugs have been proven correct in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivatives would ultimately result in cascading defaults and ruin for major portions of the banking system. Frankly, we're surprised that gold is not already at $2,000 per ounce," he added.

The banking tension was given new weight on Thursday as the Federal Reserve authorized a $180 billion expansion of its swap lines with other world central banks. The funds, which will be provided by the U.S. central bank, can be injected into money markets through overnight and term loans.

The decision comes a day after measures of short-term borrowing costs made huge jumps as banks grew increasingly wary of lending to each other in the wake of the failure of investment bank Lehman Brothers and jitters about the entire financial sector.

Speculation on Thursday had both Morgan Stanley (MS: WM 2.01, -0.31, -13.4%) seeking buyers.

The gold rally on Wednesday, the biggest dollar gains in more than two decades, came as a key money-market fund "broke the buck," as Russia halted its stock market and as rumors swirled around the health of UBS, though both the Swiss bank and its regulator denied them.

According to Brien Lundin, editor of Gold Newsletter, a piling of short positions -- or bets that gold would fall -- had led gold's recent correction to under $750 an ounce. This, he said, was unjustified, "just as gold's run over $1,000 this year was unjustified."

"Now, the fundamentals of gold are coming back into play, and we're seeing the resulting snap-back in the price," Lundin said.

"Physical demand is breaking records, mining supply continues to fall, and the economic environment is, of course, promoting safe-haven demand," Lundin continued. "The shorts are covering, the funds are buying back in, and everyone wants the safety of gold."

Steve Goldstein is MarketWatch's London bureau chief.