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Gold climbs above $1,600

LONDON - Gold prices gathered steam on Tuesday to climb above $1,600 per ounce, with broad sentiment lifted as increasingly poor economic data raised expectations that leading central banks will ease policy further to stimulate growth.

The rally in bullion was replicated in wider markets, with world share prices also rising.

US manufacturing shrank in June for the first time in nearly three years, following a string of data from Europe and Asia that suggested the euro zone debt crisis was reverberating throughout the global economy.

The European Central Bank (ECB) could be leading on the monetary front, with wide expectations for rates to hit a record low later this week. The run of poor data has boosted the case for US policy stimulus further out.

Gold typically gets support in a low interest rate environment as that cuts the opportunity cost of holding metal, with holders relying on rises in its outright value for returns.

“Over the last few weeks US numbers have worsened a lot and this has brought about the probability of QE3 - which is probably the most important reason for the market to believe in gold,” Commerzbank analyst Eugen Weinberg sa i d.

Spot gold rose 0.7 percent on the day to $1,608.39 per ounce by 0959 GMT, while benchmark US gold futures for August delivery were up around 0.7 percent to $1,609.40.

Some analysts stayed alert to downside pressure.

Dominic Schnider, an analyst at UBS Wealth Management in Singapore, noted an improved chance of US stimulus. But he was cautious on the outlook, given the Federal Reserve’s recent move to extend its “Operation Twist” programme which involves selling short-term securities to buy longer-term ones to keep long-term borrowing costs down.

“We are unlikely to see a big add-on after Operation Twist was extended, unless things fell off the cliff. And remember, when things did fall off the cliff in 2008, gold fell as well.”

The all-important US non-farm payrolls data due on Friday, expected to shed light on the state of the labour market in the world’s top economy, will be scrutinised by investors eager to predict the next move by the Fed.

Physical market quiet again

Asia’s physical gold market fell back after short-lived excitement late last week when bullion dropped below $1,550 per ounce before staging a 3-percent rally.

“Customers went in to pick up gold below $1,560 last week but now the market is quiet again,” said a Singapore-based dealer, adding that gold bar premiums were about 70 cents above London prices.

A rally in the rupee against the dollar last Friday helped gold purchases from India, traditionally the world’s top bullion consumer.

In other metals, spot silver rose to $27.90, mimicking gains in gold. Platinum rose to $1,467 while palladium was also higher at $586.75.

“The dimmed economic outlook leads to expectations of more stimulus, which will weaken the dollar and help metals,” said a Shanghai-based trader.

“Of course silver will be relatively weaker than gold due to its industrial nature, but we do sense anticipation of a further price rise in the physical market.”