NEW YORK (Dow Jones)--Gold futures rallied Tuesday as China moved to spur more investment in the metal at a time when investors are clamoring for it as a refuge.
The most-actively traded contract, for February delivery, gained $18.60, or 1.4%, to settle at $1,386.10 an ounce on the Comex division of the New York Mercantile Exchange.
Prices jumped as China approved a fund that will invest in gold exchange-traded funds outside the country, opening the door to mainland China investors who face negative real interest rates on their bank deposits and want to hedge against inflation.
Shenzhen-based Lion Fund Management Co. said they received approval from the China Securities Regulatory Commission on Monday to proceed with the fund.
"Over the longer term it should be another factor to add to gold's support," said Carlos Sanchez, associate director of research with CPM Group in New York.
The move is a step in the development of the financial market in China, the world's second largest gold consumer behind India, and the No. 1 producer of the metal. It comes on the heels of an August move to increase the number of commercial banks allowed to import and export gold, broadening the domestic market beyond the five largest commercial banks.
Chinese gold imports have been climbing as the nation's central bank started to build gold reserves in recent years and domestic interest in gold investment grew. China's gold lobby has long pressured the government to raise its gold holdings.
A first of its kind for mainland China, the fund brings Chinese buying power to an increasingly popular way for participants to invest in gold.
Physically backed gold ETFs -- which trade like stocks on exchanges but are backed by gold bars in vaults -- have proliferated in recent years. The world's largest, SPDR Gold Shares (GLD), has amassed some $56 billion and holds more gold than many of the world's central banks.
"I wouldn't be surprised to see China come up with an ETF themselves for gold," Sanchez said.
The investor-led gold buying -- which has also sent futures to a record $1,424.30 earlier this month and boosted shares of gold miners -- comes as participants are betting gold will hold its value more strongly than other holdings like the U.S. dollar or dollar-based investments.
Much of this belief stems from recent moves by the U.S. Federal Reserve to print money to fight the economic downturn. These investors are buying gold to hedge dollar devaluation and rising consumer and producer prices they see in coming years. Gold has also been an attractive investment in recent months because of ultralow interest rates, which increase the allure of non-interest bearing gold.
"A number of factors are supportive of an upward trend in price, including increasing uncertainty regarding the role of the USD within the international monetary system, concerns related to the stability of peripheral eurozone countries and growing inflationary pressures in Asian emerging markets, particularly China," BNP Paribas precious metals analyst Anne-Laure Tremblay said in a research note.
Investors have been turning more to the metal as a haven investment amid increasing concerns about European sovereign debt.
A EUR67.5 billion rescue aid package to address Ireland's fiscal woes has not done much to ease fears of a contagion, and the cost of insuring Portuguese, Spanish, and Italian five-year sovereign debt against default has hit record levels.
"With the crisis not going to be resolved anytime soon, safe-haven demand for gold is set to remain high for the foreseeable future," according to a note to clients from Dublin-based bullion dealer GoldCore.
Other precious metals traded in New York also rose. Comex March silver gained 3.7%. Nymex January platinum added 1.3%, while March palladium rose 1.2%.
