SAN FRANCISCO (MarketWatch) -- Gold futures surged to fresh record highs above $1,096 an ounce Wednesday, as the dollar sold off and buyers piled onto the metal's recent rise.
Gold for December delivery, the most actively traded contract, hit an intraday high of $1,096.2 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 $9.7 to $1,094.6 an ounce, advancing off earlier levels in the New York trading session after the Institute for Supply Management released its report on the services sector.
"What is really behind the recent rally is very robust diversification demand from central banks, hedge funds and pension funds," said Mark O'Byrne, director at bullion dealers GoldCore, in a note.
The dollar index (DXY 75.87, -0.52, -0.68%) , which tracks the performance of the greenback against a basket of other major currencies, fell 0.5% to 75.936 in recent trading. Gold prices tend to rise when the dollar falls. See Currencies.
The S&P 500 Index (SPX 1,059, +13.62, +1.30%) rose 14 points to 1,060 on Wednesday.
The Institute for Supply Management index showed business conditions improved in October across a narrower group of companies in the U.S. nonmanufacturing sectors. The ISM nonmanufacturing index fell to 50.6% from 50.9% in September, short of economist estimates.
Earlier, payrolls provider ADP said private-sector firms in the U.S. cut 203,000 jobs in October, the fewest jobs lost since July 2008.
Gold broke through key technical levels Tuesday after the International Monetary Fund said 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. See Tuesday's Metals Stocks.
Also helping, 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 $8.90 to $1,094.40 an ounce Wednesday on Globex, after closing at a record $1,084.30 in New York.
Tom Pawlicki, analyst at MF Global, said he 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 39.75, +0.58, +1.48%) 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. With these hedges, Barrick does not benefit from any increase in the price of gold.
Some hedge funds are also 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.
