Gold rallies on concerns about worldwide economy

By Claudia Assis & Kate Gibson, MarketWatch

SAN FRANCISCO (MarketWatch) -- Gold prices quickly went from red to rallying Monday as sentiment soured amid lingering concerns about the health of the world economy.

Gold futures for August delivery, the most active contract, added $20, or 1.6% to $1,238 an ounce on the Comex division of the New York Mercantile Exchange - $5 from their May 12 record of $1,243.10.

"We're seeing a lot of people readjusting their portfolios trying to figure out the best flight-to-quality asset," said Adam Klopfenstein, a trader at Lind-Waldock in Chicago. Gold is the clear winner of the day, winning over U.S. bonds and currencies, as "people are feeling more confident buying gold," he added.

It is likely to be a volatile week for gold trading, as prices will continue to push higher and test new records, Klopfenstein added. "Right now people don't want to wait for the next leg down and they are jumping into gold."

Recurrent pessimism about the financial shape of the world is likely to keep gold prices well supported around $1,198 an ounce, with a ceiling around $1,230 an ounce, said Scott Meyers, an analyst with MF Global's Pioneer Futures division in New York.

With Europe's debt situation and BP Plc's /quotes/comstock/13*!bp/quotes/nls/bp (BP 37.26, +0.10, +0.27%) oil spill in the gulf as the main focus of concerns, gold is expected to remain "nervously up" as fears about the economic recovery will still dominate, he added.

On Friday, the contract gained $7.70, or 0.6%, to end at $1,217.70 an ounce, giving the precious metal a 0.3% gain for the holiday-shortened week.

BP's latest effort to stem the flow of oil in the gulf was partly successful, but as the oil slick has the potential to move about the Eastern seaboard it could affect a much larger swath of the population and economic activities, Meyers said.

"It could slow down the economy in a way we've never seen before ... believe me, I want to be wrong on this," he said.

Last week, markets came under heavy selling pressure after a Hungarian government spokesman said that the nation faced the same sort of debt trouble that pushed Greece onto shaky financial ground.

Even as the government distanced itself from those statements, the euro stood just above $1.19 on Monday, and the dollar index /quotes/comstock/11j!i:dxy0 (DXY 88.27, +0.04, +0.04%) , which compares the U.S. unit against a basket of six currencies, was up at 88.332.

Meanwhile, holdings of the SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 121.17, +1.98, +1.66%) , the largest exchange-traded fund backed by gold, on Friday decreased by roughly three metric tons to 1,286 metric tons (1,417 short tons), down from a record on Thursday.

That represented a change of pace for the ETF, which had increased inventories by 20 metric tons last week. Analysts at Commerzbank said they don't expect a slowdown in investor demand for the product, however.

The world's biggest gold processor, Rand Refinery Ltd., announced that sales of the South African Krugerrand gold coin had increased by 50% within one week, Commerzbank analysts said in a note to clients Monday. "Prior to that, Austria's and Australia's mints had already reported a clearly increased demand for gold coins. Thus, it is not surprising that speculative investors also continue to bet on rising prices," they said.

Activity in other metals was mixed on Monday. Silver for July delivery added 10 cents, or 0.5%, to $17.40 an ounce. July copper declined 4 cents, or 1.5%, to $2.78 a pound. Copper prices were hovering around their lowest since late September.