NEW YORK (MarketWatch) -- Gold futures rose more than 2% Monday, as a $700-billion government plan to rescue the financial sector pressured the U.S. dollar lower, increasing gold's appeal as an alternative investment.
Gold for December delivery rose $19.40, or 2.2%, to $884.10 an ounce in early trading on the Comex division of the New York Mercantile Exchange. It surged to $891 an ounce in overnight electronic trading.
"The rally was sparked by a proposal that the government would create a massive reserve fund designed to soak up to $700 billion of mortgage instruments," said Edward Meir, a commodities analyst at futures brokerage MF Global.
The Bush administration proposed a plan over the weekend that would allow the government to buy the bad debt of U.S. financial institutions for the next two years. It gives the Treasury secretary authority to buy $700 billion in mortgage-related assets, and would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion.
See full story.The plan "has been largely dollar negative," said James Hughes, analyst at CMC Markets, as a higher debt will endanger the dollar's global position as a dominant currency.
The dollar was trading lower against the euro, the British pound and the Japanese yen. The dollar index
(DXY:
US Dollar Index Future - Spot Price
Last: 76.92-0.54-0.70%9:48am 09/22/2008
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DXY 76.92,
-0.54,
-0.7%) , a measure of the greenback against a trade-weighted basket of currencies, fell 0.8%. A weakening greenback tends to push up dollar-denominated gold prices.
See Currencies.More government debt will also likely weigh on the price of government bonds. Treasury prices fell by the most in two decades on Friday, as investors sold in anticipation of new supply coming on the market.
International investors may respond to the prospect of holding U.S.-denominated paper in the face of expanding supply by turning to assets such as gold and other commodities, analysts at Bank of New York Mellon said.
Indeed, most commodities moved higher Monday, with the benchmark crude-oil contract up 2% to above $106 a barrel. The Reuters/Jefferies CRB Index
(CRB:
reuters jefferies crb index price
Last: 364.10+4.52+1.26%9:48am 09/22/2008Delayed quote data
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CRB 364.10,
+4.52,
+1.3%) , a benchmark gauging the prices of major commodities, rose 0.7%.
Gold had seen dramatic changes in prices last week. The December contract surged $70 on Wednesday, the biggest daily gain in dollar terms. But it slumped as much as 7.6% on Friday, the biggest percentage loss in 25 years.
Gold ended the week up 13%, the biggest weekly gain in nine years.
In other metals, December silver rose 3.9% to $12.96 an ounce, October platinum rallied 5% to $1,204 and December palladium surged 5.5% to $250 an ounce. Copper for December delivery added 1.9% to $3.24 a pound.
In spot trading, the London gold fixing price
(38099902:
38099902
Last: 
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38099902,
,
) , used as a benchmark for gold for immediate delivery, stood at $873 an ounce Monday morning, up $4 from Friday afternoon.
