Gold Continues to Rocket, Reaching $308

Gold prices surged more than 9% on Tuesday, the biggest gain in almost two decades, as mining companies and speculators bought the metal in a bet that a restriction on sales by European central banks will send prices higher.

Near-term gold futures in New York leaped $26.20 to $308 an ounce, building on Monday’s rise of $14 and leaving the metal at its highest level since April 1998.

“The price of gold has lost its ceiling,” said Carlos Perez-Santalla, a gold trader at Hudson River Futures in New York. Current prices are “uncharted territory,” making it difficult to see an end to the rally, Perez-Santalla said.

European central banks over the weekend said they would cap planned gold sales for the next five years, removing a key factor depressing prices in recent years.

With central bank sales under control, the balance of supply and demand appears favorable, analysts said. In the second quarter, world gold demand was a record 809.5 metric tons, up 16% from a year earlier, led by a surge in sales in the U.S., Japan and South Korea, according to the producer-funded World Gold Council.

Still, analysts noted that a key reason for Tuesday’s price surge was “short-covering” by traders who had bet the metal was going lower and were buying gold to close out their wrong-way bets.

“Many people are buying because they have to buy,” said Paul Lee, gold trader at Dresdner Kleinwort Benson in Sydney.

In the Persian Gulf region, gold’s jump “has taken most of the traders by surprise,” said Kandaswamy Krishnamurthy, manager of Bexmoney, a bullion and foreign exchange trading company based in Bahrain.

“We just don’t know how big the short positions are,” said Kevin Norrish, economist at Barclays Capital in London. “There must be massive short positions out there.”

Experts also said the rally could create its own momentum, attracting speculators who may have been playing in other markets, such as oil. Many speculators in Asia, for example, have shunned the metal during its long price slump.

Fundamental demand from Asia also could help the price. India, which accounts for 30% of world gold demand, is expected to boost purchases as manufacturers gear up for seasonal festivals when jewelry is a popular gift.

“Demand will go up in India because the investment interest in gold increases,” said Prakash Solanki, director of Deep Diamond India Ltd., a gold jewelry manufacturer based in Mumbai, India.

The preparations for Dewali, the peak of the Hindu festival calendar in November, probably will boost gold demand because “jewelry makers start to buy their gold one month before, in September and October, so they can start manufacturing,” Solanki said.

But if gold mining stocks are an indication, some on Wall Street don’t see gold prices going much higher. Major gold stocks were up modestly or lower Tuesday after soaring Monday.

The stocks backed off as gold futures retreated from midday prices as high as $330 an ounce.

Barrick Gold, for example, fell 25 cents to $23.88 after surging $3.94 on Monday.

ASA added 6 cents to $21.63, Placer Dome rose 25 cents to $15.69 and Homestake Mining gained 44 cents to $10.25, but Newmont Mining sank 81 cents to $27 and Echo Bay Mines lost 38 cents to $2.06.

Gold stocks often telegraph near-term moves in the metal itself, analysts noted.

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Miners’ Stocks

Major gold-mining stocks have resurged in recent days but remain far below their peaks of the mid-1990s. Standard & Poor’s index of four major gold stocks, quarterly closes and latest:

Tuesday: 164.45

Source: Bloomberg News