Gold rallies after worst annual loss in 32 years as equities drop

By Frank Tang and Clara Denina

NEW YORK/LONDON (Reuters) - Gold rose nearly 2 percent on Thursday as sharp losses in the equity market prompted funds to buy bullion on the first trading day of the new year after the metal's worst annual decline in more than 30 years.

Silver rallied about 4 percent for its biggest one-day gain since mid September, while platinum group metals also jumped 2 percent in tandem with gold's rally.

New positions initiated by institutional investors at the start of the new year and some bargain hunting following the metal drop to a six-month low in the previous session triggered bullion demand, traders said.

Analysts said that the inverse correlation between gold and equities could strengthen in 2014 after bullion's tumble and the stock market's strong run last year.

"As investors take profits from the equity market after its break-neck pace of growth last year, gold will continue its upward momentum," said Jeffrey Sica, chief investment officer of New Jersey-based Sica Wealth Management, with over $1 billion in client assets.

U.S. stocks, measured by the S&P 500 index, fell 1 percent Thursday on the first day of trading in 2014 as investors booked profit in the wake of the S&P 500's best yearly advance since 1997.

In contrast, gold sank by 28 percent in 2013, ending a 12-year bull run and posting its largest loss in 32 years, as the U.S. Federal Reserve announced plans to unwind its monetary stimulus.

Spot gold rose to a two-week high of $1,230.65 an ounce late in the New York session when losses in the U.S. stocks market deepened.

It was last up 1.7 percent at $1,226.19 by 2:15 p.m. EST (1915 GMT), marking bullion's best one-day rise since October 22.

U.S. gold futures for February delivery settled up $22.90 to $1,225.20 an ounce. Trading volume was in line with its 30-day average, preliminary Reuters data showed.

Some Asian dealers said the gold market was supported by strong Chinese physical demand as bargain buyers returned.

Gold also rallied in the face of a stronger U.S. dollar and sharp losses in crude oil prices.

The metal is traditionally seen as a safe haven in times of economic uncertainty and as a hedge against inflation.

Other analysts cited thinner volumes in the New Year holiday week and index rebalancing for Thursday's rally.

"I wouldn't read much into today's gains and generally the first few sessions of the year can be misleading, as you have all the index rebalancing taking place," Natixis analyst Nic Brown said.

Among other precious metals, silver rose 3.8 percent to $20.06 an ounce. Silver was the second-biggest loser for the year on the 19-commodity Thomson Reuters/Core Commodity CRB index. Only corn turned in a worse performance last year, while gold was the third-biggest loser.

Platinum was up 2.3 percent at $1,402 an ounce, having lost 12 percent in 2013. Palladium rose 2 percent to $725.50 an ounce. It was the only precious metal to chalk up a positive performance in 2013, gaining nearly 2 percent.

(Additional reporting by Lewa Pardomuan in Singapore; Editing by David Goodman, Dale Hudson and Nick Zieminski)