* Gold, silver rally on safe-haven buying
* AIG, U.S. investment bank shares slump
* GFMS predicts rise in gold prices in fourth quarter
(Adds comment, updates prices)
By Jan Harvey
LONDON, Sept 17 (Reuters) - Gold prices rallied more than 7
percent to a 2-1/2-week high as losses in U.S. investment
banking stocks and doubts over the government's bailout of
insurer AIG sparked safe haven buying.
Sliding U.S. equity markets and worries about the financial
outlook have sparked a flight to "safer" assets, such as
bullion, analysts said.
"It looks like (gold) has finally found its safe-haven bid,"
said Standard Chartered head of commodity research Helen Henton.
Spot gold <XAU=> rose 6.8 percent to $828.30/829.40 an ounce
as of 1539 GMT from Tuesday's nominal close in New York of
$775.55.
The precious metal rallied sharply after hitting technical
stops above $790 an ounce, climbing to a session high of $831.10
an ounce, according to traders.
Gold prices are reacting to deepening fears over the outlook
for U.S. investment bans and concerns over the government's
rescue plan for AIG, which have sparked fresh buying of
commodities.
The U.S. Federal Reserve said in a statement it would extend
AIG <AIG.N> $85 billion in exchange for a nearly 80 percent
stake to bail it out. []
But the insurer has posted losses despite the Fed's move,
with shares trading down 44.53 percent at 1539 GMT.
Investment banking shares are also suffering, as Lehman
Brothers' insolvency earlier this week raises questions about
the future of the sector.
FALLING BANK STOCKS
Shares in Wall Street banks Morgan Stanley and Goldman Sachs
plummeted as worries over the outlook for the financial sector
multiplied, sparking a rise in oil and gold prices.
A spike in interbank lending rates in the United States has
added to worry about the global financial system. As financial
worries spread, Russia halted stock and bond trading in a
response to the worst market falls since 1998. []
U.S. stocks slid 2 percent, amid fears over falling
financial stocks. Morgan Stanley was down 33.97 percent and
Goldman Sachs off 21.18 percent at 1540 GMT. []
With the problems facing investment banks likely to worsen,
gold could post further gains as the flight to safety gains
strength, analysts said.
"As long as the turmoil in the financial markets continues,
and as long as the banks distrust each other... the preference
for safe-haven assets is definitely going to continue," said
Dresdner Kleinwort consultant Peter Fertig.
The dollar meanwhile weakened, also reacting to a rise in
risk aversion among U.S. investors. []
A softer dollar typically supports gold, which is often
bought as an alternative investment ot the U.S. currency.
Precious metals consultancy GFMS said in a report on
Wednesday that investment demand was expected to drive gold
prices "well above" $900 an ounce in the fourth quarter as the
dollar slips and the outlook for the financial sector worsens.
"GFMS expects that a deepening financial crisis coupled with
the United States entering a recession -- or close to -- will
result in further loosening of U.S. monetary policy," it said.
[]
Silver meanwhile tracked gold higher, rising 8.5 percent to
a one-week high of $11.34 an ounce before easing to trade at
$11.18/11.23 an ounce.
Among other precious metals, spot platinum <XPT=> was
trading at $1,065.00/1,085.00 per ounce, up 1.5 percent from
Tuesday's close in New York.
Spot palladium <XPD=> was trading unchanged from Tuesday's
nominal New York close at $222.50/228.50 an ounce.
(Reporting by Jan Harvey; editing by Christopher Johnson)
