Gold rises 3% on weak dollar, investment demand

Reuters NEW YORK/LONDON

GOLD prices rose nearly 3% on Friday, breaking above $840 an ounce, on a sharply lower dollar against the euro, lingering economic worries and signs of strengthening investment demand.
    Spot gold was at $840.30 an ounce at 2:55 pm EST, up 2.8% from the last trade of $817.45 on Thursday. US gold for February delivery settled up $32.60, or 4%, at $839.90 an ounce on the COMEX division of the New York Mercantile Exchange. US metals markets will shut Monday for the Martin Luther King Jr. holiday and reopen for regular trade Tuesday. Gold ignored short-term deflation concerns. US inflation slowed to a half-century low last year, with the Consumer Price Index dropping a sharp 0.7% in December, a third straight monthly decline.
    "The fall in headline CPI was a bit less than the market had priced in, and core CPI was unchanged, so that was supportive of gold," said Dresdner Kleinwort consultant Peter Fertig. A recovery in the euro and the equity markets was supporting the precious metal, he added. The dollar extended losses versus the euro after the government report showing a continued drop in US consumer prices, helping revive appetite for other currencies.
    In addition to the weak dollar, interest in bullion as a haven from risk was also lifting gold, analysts said. "Risk aversion is high," said Commerzbank analyst Eugen Weinberg. "People are looking at gold right now as a real hedge against everything — an alternative asset." Weakness in the banking sector, with Bank of America and Citigroup reporting large fourth-quarter losses on Friday, was increasing investor jitters and further supporting gold, he added.
    Investment demand for physical gold remains strong as turmoil in the financial markets and fears over the outlook for the global economy boost bullion's appeal.The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, said its holdings rose on Thursday to a record 795.25 tonnes. Demand for physical gold from ETFs has been a major factor supporting prices in recent years. In December, SPDR overtook the Bank of Japan as the world's seventh largest holder of gold.
    The world's largest silver-backed ETF, the iShares Silver Trust, said its holdings climbed 1% to a record 7,143.27 tonnes on Jan. 14. Strength in demand for silver bullion from ETFs is helping to outweigh falling demand in other areas, analysts said.