By Polya Lesova & Myra P. Saefong, MarketWatch
FRANKFURT (MarketWatch) -- Gold futures surged to a record on Wednesday, as a weak dollar and India's recent purchase of bullion continued to whet investors' appetite for the precious metal.
Gold for December delivery, the most actively traded contract, hit an intraday high of $1,094.60 an ounce in electronic trading on Globex, a record for the contract. It surpassed Tuesday's peak of $1,088.50 an ounce.
December gold futures were last up $8 to $1,092.90 an ounce.
"Gold can hold these levels, and while it is slightly overbought in the short term, it remains undervalued from a long-term inflation and historical basis," said Mark O'Byrne, director at bullion dealers GoldCore.
"What is really behind the recent rally is very robust diversification demand from central banks, hedge funds and pension funds," he wrote in a note to clients.
Also, at the conference of the London Bullion Market Association in Scotland earlier this week, market players gave a very bullish outlook, O'Byrne said.
The front-month, but very thinly traded, November contract rose $8.60 to $1,092.90 an ounce Wednesday on Globex, after closing at a record $1,084.30 in New York.
The dollar index (DXY 76.14, -0.24, -0.32%) , which tracks the performance of the greenback against a basket of other major currencies, fell 0.3% to 76.143 in recent trading. Gold prices tend to rise when the dollar falls.
On Tuesday, December gold closed up $30.90 an ounce, or 2.9%, to $1,084.90 an ounce, a record closing level for the contract.
The International Monetary Fund said on Monday that it sold 200 metric tons of gold to the Reserve Bank of India, part of a total of 403.3 metric tons of gold approved for sale in September. The news of India's purchase underpinned gold's advance on Tuesday. See Tuesday's Metals Stocks.
Tom Pawlicki, analyst at MF Global, expects "gold prices to make further upside progress over the near term."
"Support will come from IMF sales to India, planned dehedging by Barrick, hedge-fund purchases, and technical factors," Pawlicki wrote in a note to clients.
Barrick reduces gold hedges
Earlier this week, Barrick Gold Corp. (ABX 39.17, +2.66, +7.29%) reduced its hedge book by 1 million ounces of gold in October.
Barrick plans to eliminate its remaining 1.9 million ounces in gold hedges by September 2010 because it wants to gain full leverage to the gold price on all future production based on the increasingly positive outlook for gold.
Gold hedges are contracts where Barrick has sold ounces of gold forward and will receive a fixed price upon delivering into these contracts. As a result, Barrick does not benefit from any increase in the price of gold.
Recent press reports have also indicated that some hedge funds are actively buying gold.
Gold may be "competing with T-bills as a place to park excess cash," Pawlicki said. "Gold sometimes has the appearance and reputation of being a `risk-free' asset."
Gold has historically been seen as a safe-haven asset. Investors tend to buy the metal as a hedge against economic and financial turmoil.
"Central banks portray a long-term picture of things to come," said Chintan Karnani, an analyst at Insignia Consultants in New Delhi. "If central banks are buying gold, why should retail investors be left behind?"
The rise in gold prices was also partly due to the "massive short covering and option-related buying," he said, characterizing the Tuesday rally in gold and other commodities as "too much money chasing too few goods."
At the same time, scrap-gold sales have ended, and Karnani expects to see greater jewelry demand at prices below the $1,050 level.
On a technical level, $1,125.40 is key resistance, he said. That level needs to be breached for gold to see further gains.
And if gold's rally continues into next week, he predicts gold prices could reach $1,200 this month.
