Gold prices posted the biggest weekly gain in 18 months as turmoil in European currency markets spurred demand for the metal as a haven.

Aggregate open interest in gold futures on Jan. 15 surged 5.6 percent, the most since October 2009, following the Swiss central bank’s surprise move to abandon the franc’s cap against the euro. Assets in the biggest exchange-traded product backed by the metal rose the most since August 2011.

Gold climbed to a four-month high on Friday, while call options for the right to own February futures at $1,300 an ounce soared sevenfold in two days. Signs of cooling expansion in Europe boosted speculation that policy makers will add to stimulus, increasing demand for a store of value. Muted inflation and stagnant foreign economies may prompt the Federal Reserve to delay an increases ininterest rates.

“There’s a lot more uncertainty in Europe and the U.S., and that’s piqued a lot of investors’ interest in gold,” Fain Shaffer, the president at Infinity Trading Corp. in Indianapolis, said in a telephone interview. “Rising open interest is bullish for gold and means that traders feel gold is going to move higher over the short term.”

David Fuller's view

Seasonal factors for gold remain favourable and traditional buyers from China to India have continued to purchase bullion.  Western investors appear to be remembering that gold is ‘hard money’, not least because far less of it is mined and refined, relative to the printing of fiat currencies by central banks.  The investment banks that were previously trying to talk gold down to $1000 and even $800 may be giving up on that effort.  

Technically, gold bullion has now confirmed a failed downside break beneath the $1200 region, evidenced by its push back above the last two lower rally highs on this chart and also the 200-day (40 week) moving average.  Downside risk should now be limited to consolidations of recent gains before the upper side of the current trading range near $1400 is tested.