Gold lures buyers after hitting a 14-month low

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Today’s surprise winners in financial markets: precious metals.

Gold futures in New York closed up $37.50, or 5.3%, to $742.40 an ounce, the biggest one-day gain since mid-September. Silver and platinum also surged.

What’s odd is that most other commodities are flat or down today, including oil. And the dollar is off just modestly against other major currencies; often, gold only gets a big lift when the greenback is tumbling.

Some analysts say the rally has the scent of ‘short covering’ by traders who’ve been betting, correctly, that gold would drop in recent weeks with the general meltdown in commodities.

Near-term futures closed at $704.90 an ounce on Thursday, the lowest since September 2007 and down from $839 in mid-October.

Jon Nadler, a veteran metals analyst at Kitco Inc. in Montreal, said there also were rumors today that a large hedge fund had put in a ‘sizable’ order for gold.

What’s more, the metal could be getting a boost from fears that this weekend’s summit of the G20 group of developed and developing nations will disappoint investors hoping for a concerted effort to halt the global economy’s slide.

Still, Nadler thinks gold may have further to drop as the economy worsens, inflation fears continue to ebb and demand for raw materials overall continues to wane. He says the price could decline to between $620 and $660 an ounce.

Analysts at Deutsche Bank in London today said that relative to the dollar’s level, a fair price for gold would be about $600.

Bill O’Neill, a partner at commodities trading firm Logic Advisors in Upper Saddle River, N.J., said the major obstacle to a sustained rally in gold is that many hedge funds continue to dump commodity investments to meet redemption demands from panicked clients, or just to raise cash for safety’s sake.

‘This is a money flow game,’ he said: Despite what appears to be strong demand for actual gold from India and other parts of the world as the price has dropped, selling by hedge funds and other traders is overwhelming that demand, O’Neill said.

One question that looms: If more investors begin to fear a global recession so deep that it triggers widespread deflation, how would gold fare?

An argument for buying gold in a deflationary world is that it might still be a relative haven, if investors flee most other investments.

Although gold probably would fall in a general deflation, the decline may be ‘less than your average condo or retail stock,’ Nadler said.