By Frank Tang and Paul Lauener
NEW YORK/LONDON (Reuters) – Gold prices rose sharply on Wednesday as the dollar weakened after U.S. Treasury Secretary Timothy Geithner talked about a system put forward by China that would replace the dollar as the world’s reserve currency.
Geithner said he was “quite open” to China’s suggestion of moving toward a currency system linked to the International Monetary Fund’s Special Drawing Rights (SDRs), a basket of dollars, euros, sterling and yen, as a super-sovereign reserve currency.
That hit dollar sentiment as it could mean countries selling large portions of their dollar reserves, highlighting the use of gold as a hedge against the U.S. currency, analysts said.
Spot gold was at $937.10 an ounce at 2:10 p.m. EDT, up 1.3 percent from its last quote in New York late Tuesday.
U.S. gold futures for April delivery settled up $12.00, or 1.3 percent, at $935.80 an ounce on the COMEX division of the New York Mercantile Exchange.
“The dollar came off after Geithner’s comments,” said Eugen Weinberg, analyst at Commerzbank. “Gold gained on the dollar.”
A weaker U.S. currency makes metals priced in dollars cheaper for holders of other currencies.
However, gold pared gains when Geithner later said the dollar would remain the world’s reserve currency for a long time.
Gold’s use as a hedge against financial uncertainty has come under pressure in recent days as stock markets rallied on optimism about the U.S. government’s drive to clean up bad loans held by banks.
U.S. stocks, however, turned negative later in the session as enthusiasm from upbeat economic data faded, supporting the price of the metal.
Bullion is up about 5 percent from a six-week low of $882.90 hit on March 18, but is still more than 7 percent shy of the 11-month high above $1,000 set in February. It soared to an all-time peak of $1,030.80 in March 2008.
Investors piled into gold in recent months as the financial crisis escalated, the dollar tumbled and markets started to worry about price pressures in the pipeline because of the vast amounts of money being pumped into economies.
“In addition to the factors that have always been driving gold prices higher, the Fed’s decision last week is simply another impetus,” said Dennis Gartman, independent investor and author of the daily Gartman Letter.
Last Wednesday, the Federal Reserve said it would buy up to $300 billion worth of long-dated U.S. government debt to help ease credit market conditions.