By ANDREA HOTTER

For the first time in months, gold prices are doing what textbooks say they should: increasing when risk appetite falls.

Spot gold is holding just shy of two-weeks highs at near $1,170 a troy ounce, despite a rout in the broader financial markets which has seen other commodity prices slump and the dollar strengthen.

"Gold's safe-haven attributes are beginning to trump its currency-hedge attributes," said HSBC's James Steel. "If continuing sovereign risk concerns are more likely to elicit stronger safe-haven buying in gold than currency-related selling, then further sovereign risk concerns may be bullish for the bullion market," he added.

Until now, fears of sovereign risk have acted as a serious damper to the price of gold. For many months, gold prices have strengthened when risk appetite rises and declined when the hunger for risk wanes.

Treasury have instead benefited, which has supported the dollar and weighed on gold.

That changed Tuesday, when Greece—which has been at the top of the potential sovereign default list—was downgraded by ratings agency Standard & Poor's. S&P also downgraded Portugal, and on Wednesday cut its ratings on Spain.

"Given the worsening European debt situation and contagion fears we expect gold, and to a degree silver, to remain firmly underpinned by investment diversification," said TheBullionDesk's James Moore.

Yet views are mixed over how long gold's risk-related allure will last. Many economists argue that gold has been "desensitized" by past crises, with the aftershocks of geopolitical events tending to be shorter in duration and more muted in magnitude over time. This means gold's price peaks occur sooner and fade more rapidly.

The performance of gold in the 100 days following some of the major shocks to hit global financial markets shows a similar pattern. Through six separate periods, ranging from the Soviet invasion of Afghanistan in 1979 to the 2003 Iraq war, the dollar depreciated after the event and provided only short-term benefits to gold. A similar situation was seen during the terrorist attacks in Madrid and the U.K., as well as during the collapse of Lehman Brothers.

But if gold has many times failed to be a safe haven in the past few years, it may be the current nature of the risk that has allowed the precious metal to stand firm against the rising dollar this week.

According to the World Gold Council, gold is among a handful of financial assets that don't rely on an issuer's promise to pay, offering refuge from default risk. This means that during volatile and uncertain times, there is typically a flight to quality as investors seek to protect their capital by moving it into assets considered to be safer stores of value, the WGC said.

"Panic is growing as the Greek situation is spinning out of control...We expect gold prices to keep advancing and take a bullish stand today," said Filip Petersson of SEB Commodity Research.

Write to Andrea Hotter at andrea.hotter@dowjones.com

source: http://online.wsj.com/article/SB10001424052748704423504575211784026761558.html?mod=WSJ_Markets_LEFTTopNews