Gold Rises As Concerns Grow About Bail Out

Gold prices rose on speculation that the proposed $US700 billion plan to stabilise the US financial markets would eventually weaken the dollar and lead to greater demand for gold and other precious metals as an alternative investment.

Congress is weighing out the proposals by US Treasury Secretary Henry Paulson designed to ease the credit crisis that sent Lehman Brothers into bankruptcy last week. Gold has already gained 7.2% this month as the financial crisis sparked demand for safe haven assets.

If the US Congress does approve the plan it’s expected that gold will attract foreign buyers who want to reduce their exposure to the dollar. Gold futures for December delivery rose $US3.80, or 0.4%, to $US895 an ounce on the Comex division of the New York Mercantile Exchange. The metal gained 13% last week, the most since October 1999, and is up 6.8% this year.

Many analysts believe that the plan to rescue the US banking system will erode the appeal of US Treasuries and drive down the dollar. Investors outside of the US own 56% of the $US4.8 trillion in marketable Treasuries outstanding, up from 42% of the $US3.4 trillion five years ago, according to data compiled by the government.

Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has increased 6.7% this week to a record 724.9 metric tons after climbing 11% last week. The fund is the eighth-largest holder of bullion, according to the World Gold Council. The top three holders are central banks in the US and Germany and the International Monetary Fund.