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Asian gold recovers after overnight drop

HONG KONG: Spot gold rose in Asia on Tuesday after toppling nearly $20 an ounce overnight as hope returned that the upward trend in gold's price would continue.

Spot gold was quoted at US$304.50/306.00 an ounce compared with New York's previous close at US$300.80/302.80 on Monday.

Decisions by major mining companies to scale back their hedging, or forward sales of gold, would ease downward pressure on the price and also reflected the producers' belief in a brighter outlook for gold, traders said.

"You are starting to see gold making a comeback as another asset to invest in," said Jon Sutton, head of corporate management risk, commodities at Commonwealth Bank of Australia in Sydney.

Buying from Japan on Tuesday offset selling by Australian producers, traders said.

But nervousness kept many sidelined and bid/offer spreads remained wider than usual at $1.50 to $2.00 because of earlier volatility.

Spot gold soared to US$319 bid on Monday after major producer Placer Dome Inc surprised the market by suspending its programme of hedging.

The market expected other producers to follow suit, but Barrick Gold Corp, also of Canada, said it would slow its hedging only slightly, which disappointed the market and led speculators in New York to sell.

Hedging allows a producer to guard against a fall in gold prices by selling future production at a fixed price, but the strategy can backfire when bullion prices rise.

Other factors helping gold were expectations of fewer central bank gold sales and volatility in other markets, dealers said.

Gold rallied to a two-year-high of US$338 last October after 15 European central banks agreed to limit their sales and lending of gold reserves, removing a major source of bearishness.

Greater volatility in the stock and bond markets and worries about returning inflation could draw more investors to gold, which served as a popular hedge in the 1970s when inflation raged.

"There is a new sentiment that gold could be an inflation hedge," Raymond Chan, president of the Hong Kong gold exchange, said.

Chan, speaking at a news conference, said he forecast last month that gold could rise as high as US$370 an ounce in 2000, but now he thinks it may go higher.

Commonwealth Bank's Sutton said he expected gold to return to the US$340 level.

Shares in North American gold companies rallied after the announcement by Placer Dome, the world's fifth largest gold miner, that it would suspend its hedging.

But the gains on the Toronto Stock Exchange's gold and precious minerals index quickly evaporated after the gold price's steep drop on Monday on the news from Barrick Gold Corp.-Reuters