Gold up nearly 2 percent on ETF inflow, tight physical supply

By Frank Tang and Clara Denina

NEW YORK/LONDON (Reuters) - Gold rose nearly 2 percent on Monday, hitting its highest in nearly three weeks as strong Chinese gold consumption and an inflow to gold-backed exchange-traded funds fuelled hopes of resurgent physical and investment buying.

Silver soared more than 4 percent to a near two-month high on gold's coattails, while recent strong U.S. and Chinese economic activities prompted some investors to buy silver as an industrial play.

The yellow metal extended its winning streak to a fourth consecutive session after Chinese trade data showed the country's gold demand surged year-over-year in the first six months.

"Gold is rallying on indications of some physical demand in the market," said Bill O'Neill, partner of commodities investment firm LOGIC Advisors.

"But the ETF holdings increase has to be sustained to indicate it is the start of a new trend," O'Neill said.

Holdings in the world's largest golf ETF SPDR Gold Trust grew by nearly 2 tonnes to 911.13 tonnes on Friday - the first increase since June 10. The fund has seen more than 435 tonnes in outflows this year, about $19 billion at current prices.

Spot gold rose 1.7 percent to $1,336.24 an ounce, having earlier traded as much as 2.2 percent higher at $1,343.06, its highest since July 24.

U.S. Comex gold futures for December settled up $22 at $1,334.20 an ounce, with trading volume about 30 percent below its 30-day average, preliminary Reuters data showed.

On charts, Monday's rally lifted gold sharply above its 50-day moving average, and analysts said the next key technical resistance is the 100-day moving average near $1,380 an ounce.

Gold posted its second weekly gain last week as recent stronger economic indicators around the world bolstered bullion's inflation-hedge appeal.

Silver rose to a near two-month high of $21.45 an ounce and was last traded up 4.2 percent at $21.39.

PHYSICAL TIGHTNESS

Physical supply tightness was reflected by narrowing spreads between delivery months in the U.S. Comex futures market.

For a second straight session, the October contract settled 10 cents above that of December, a market condition known as backwardation where the nearby delivery price of a commodity rises above the price for future delivery.

Record Asian physical demand has soaked up gold bars and coins since bullion's $225 two-day selloff in April, contributing to some shortages in the near-term market, dealers said.

Unlike other commodities, gold is also a highly liquid international monetary vehicle and a prolonged backwardation is rare for the metal, traders said.

Among platinum group metals, platinum was down 0.4 percent to $1,493.72 an ounce, while palladium dropped 0.6 percent to $735 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore and Z. Sun in London; Editing by Dale Hudson, Keiron Henderson and Nick Zieminski)