LONDON — Gold rose more than 1% to a two-week high on Wednesday, in line with other commodities and stock markets after the US Congress passed a bill fending off huge tax hikes and spending cuts that threatened to jeopardise economic growth.
Lawmakers on Tuesday approved the deal to prevent the world’s largest economy from falling off the so-called "fiscal cliff" and into recession.
Gold was up $16.80 at $1,691.34 an ounce at 3.41pm GMT, after earlier touching a two-week peak of $1,694.70. US gold for February rose $16.00 an ounce to $1,691.80 an ounce.
The long-awaited deal prompted a broad global market rally on Wednesday, with shares and commodities rising sharply while the dollar and safe-haven government bonds fell.
"My sense, across all markets, is that the path of least resistance is higher," said Tom Kendall, head of precious metals research at Credit Suisse.
"But it’s clear that people know there is a lot more negotiation to go as we move through January and February."
The deal averted immediate pain including income tax hikes for almost all US households, but did nothing to resolve other political showdowns over the budget that loom in coming months.
Spending cuts of $109bn in military and domestic programmes were only delayed for two months.
Gold tracked other financial assets and commodities such as oil higher as the dollar weakened.
"Gold will be benefiting from an anticipation that the dollar will weaken as risky assets go up," Nic Brown, an analyst with Natixis, said.
A softer dollar boosts commodities priced in the greenback by making them cheaper for holders of other currencies.
Gold is traditionally an inflation hedge and a market that investors rush to in times of trouble, but the metal has lately behaved more like an industrial commodity — rising and falling with the stock market and sometimes even following the dollar.
Ole Hansen, a vice president at Saxo Bank, said that if gold closes above a current resistance level of around $1,685, the metal could attract more speculative buying, with $1,721 in sight.
Gold ended up around 7% in 2012, the 12th straight year of gains, although it recorded a soft final quarter to the year when it fell 5.4%, its worst quarterly performance since the July-to-September period of 2008.
Its struggle to maintain traction has dented some investors’ confidence in the metal, curbing a stronger move in prices.
"The temporary resolution of the fiscal cliff problem, coupled with some new year zeal, will push prices higher to start with, but overall nothing has really changed from this time a week ago, or a month ago," Marex Spectron said in a note.
"As such, the markets will remain slightly moribund and range-bound between $1,650 and $1,700 for the time being."