Gold Rebounds on Demand for Alternative to Slumping Euro Amid Debt Crisis

Gold futures rebounded from a one- week low on demand for an alternative to the slumping euro.

The euro dropped below $1.20 for the first time since March 2006 on mounting concerns that Europe’s sovereign-debt crisis will spread to global markets. U.S. and European equities retreated, and most commodities headed for a weekly loss.

“Gold becomes the benefactor when all other currencies fail,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “There is still a flight-to- quality demand.”

Gold futures for delivery in August rose $7.70, or 0.6 percent, to $1,217.70 an ounce on the Comex in New York. Earlier, the price dropped as much as 1 percent to $1,198.10, the lowest level since May 25. The metal rose 0.2 percent this week.

Gold priced in euros reached a record. Futures in New York surged to an all-time high of $1,249.70 on May 14, and the metal has outperformed equities, bonds and most commodities this year on escalating demand for a store of value.

Gold may reach $1,700 in the next year, partly on demand from Asian central banks, Michael Lewis, the head of commodities research at Deutsche Bank AG, said today in an interview in Lima. He also cited surging investment in exchange-traded funds.

Global holdings of gold ETFs were at 2,008.1 metric tons as of yesterday, according to data compiled by Bloomberg. That represents 78 percent of last year’s global mine production.

Deflation ‘Danger’

Equities fell following a report showing the U.S. added fewer jobs in May than economists forecast. The Reuters/Jefferies CRB Index of 19 raw materials fell as much as 2.4 percent.

“In the western world, deflation is the bigger short-term danger, and inflation is potentially a longer-term concern,” Deutsche Bank said in a report.

Gold may fall less than other assets in a deflationary economy, McGhee said.

“When the economy goes into a double-dip recession, everything will go down, and gold simply has to hold its value,” McGhee said.

Palladium fell for the fifth straight session, the longest slump since late January. Futures for September delivery declined $19.80, or 4.4 percent, to $431 an ounce on the New York Mercantile Exchange. The price tumbled 7 percent this week.

Platinum futures for July delivery fell $17.60, or 1.1 percent, to $1,525.30 an ounce. The metal dropped 1.6 percent this week.

Silver futures for July delivery dropped 63.2 cents, or 3.5 percent, to $17.299 an ounce on the Comex, capping a 6.1 percent drop this week.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.