Gold Rises in London on Demand From Chinese Consumers

New York (Feb 29)  Gold rose on Monday as data showed bullish bets in the commodity have risen to a 16-month high. Gold traded 1% higher at $1,234.50 in mid-morning trade in London. The gains reflected consumers in China buying the metal after its prices dipped late last week, said Robin Bhar, Head of Metals Research at Societe Generale CIB.

Gold fell 1.5% on Friday, weighed down by good U.S. economic data and higher-than-expected inflation figures that strengthened the dollar and increased the likelihood of U.S. interest rate hikes this week.

When rates rise gold finds it harder to compete with yield-bearing assets. A stronger dollar makes gold more expensive to those who invest in other currencies.

Still, gold is still on course for an 11% gain in February, reflecting safe-haven buying driven by deepening fears over China's economic growth.

Data from the Commodities Futures Trading Commission showed that speculators increased their net long position by 32% to 124,000 lots last week. That extends hedge funds' bullish run to eight weeks of buying, the longest streak since 2012, noted Ole Hansen, head of Commodity Strategy at Saxo Bank.

"The gold buying frenzy continues," Mr. Hansen said.

Still, most analysts believe that the metal is still vulnerable to a correction.

"Gold momentum remains strong but the metal is increasingly dependent on continued weakness in oil, stocks and the dollar to drive it higher," Mr. Hansen said.

The dollar was lower on Monday and lost 1% against the yen. A weaker dollar can support gold prices by making it cheaper for investors holding other currencies to buy the dollar-denominated metal.

Gold may have also seen support from buying in India, one of the world's largest consumers of this metal.

Commerzbank said there has been a spike in buying there after the government decided in Monday's budget to leave a gold import duty unchanged at its current level. Some consumers had delayed gold purchases on the expectation that the tax would be reduced.

"This has sparked increased buying interest among Indian traders today--in the run-up to the budget they had been holding back on gold purchases," analysts at Commerzbank said.