Market Report: Equities lose their shine amid rush for gold

Gold-related issues rallied last night as investors, worried by the risk of inflation as central banks pour ever more money into flagging economies, hedged their bets by buying into the precious metal.

The US Federal Reserve's decision to buy $300bn (£207bn) of sovereign debt prompted the move, with the market fearing others such as the European Central Bank, which has been sitting on the sidelines as the Bank of England and the Bank of Japan make similar moves, will have to follow suit.

The Fed's move has already weakened the dollar, and a similar move elsewhere promises to hit other "safe haven" currencies. This is likely to leave hard assets such as gold as the only "true hedge against the rising risks of out-of-control inflation at the back end of this economic cycle", according to Liberum Capital.

"Gold, the 'anti-dollar', had a spectacular move after its pre-announcement weakness," the broker said, highlighting the jump from around $888 per ounce before the Fed's announcement to $932 per ounce at the start of play yesterday.

By the afternoon, the gold price had swung comfortably past the $950 mark, boosting the share price of London-listed miners such as Randgold Resources, which surged by more than 16 per cent or 485p to 3485p.

Smaller peers Peter Hambro Mining, up almost 13 per cent or 53.2p at 469.75p, and Hochschild Mining, up almost 6 per cent or 11.5p at 207p, were also strong.

The wider commodity sector strengthened, too, with Kazakhmys gaining 15.3 per cent or 46.5p to 349.75p and Vedanta Resources adding 11.4 per cent or 65p to 632.5p.

Overall, hopes that the Fed's actions might spark an early recovery in the United States were overshadowed by news from the International Monetary Fund, which said the world economy may contract by as much as 1 per cent this year.

The IMF was also critical of US Treasury Secretary Tim Geithner's financial stability plans, prompting concerns about further turmoil.

As a result, the FTSE 100, which touched a session high of 3,912.6, closed with a gain of only 11.9 points at 3,816.9. The FTSE 250, although 69.9 points firmer at 6,261.6, was also off its earlier highs.

Legal & General was the strongest on the benchmark index, swinging to 38.1p, up just over 22 per cent or 6.9p, after better-than-forecast results from Prudential, which was 13.4 per cent or 33.7p stronger at 285.5p, squeezed the bears out of the life insurance sector.

Friends Provident, down 5.3 per cent or 3.3p at 58.5p, missed out on the upswing after Citigroup switched its stance on the stock to "hold" from "buy".

Elsewhere, the banks fared well. Although the sector rallied across the board, stocks pared earlier gains as news of the IMF's forecasts filtered into the market.

Lloyds Banking Group, up 14.2 per cent or 6.8p at 54.4p at the close, was well clear of its 65.1p intra-day high. Royal Bank of Scotland, which jumped to 27.5p at one point in the session, was at 24.2p, up 1.1p, at the end of play.

On the second tier, Brixton advanced to 22p, up over 29 per cent or 5p, as investors cheered the sale of two buildings at the industrial landlord's Kingsland Business Park in Basingstoke, and HSBC switched its stance on the stock to "overweight" from "underweight".

As buyers returned, short sellers were said to be scrambling to abandon their downside bets, and in turn, further pushing up the share price.

ARM Holdings was less fortunate, easing by 3.3 per cent or 3.5p to 102.5p after Goldman Sachs called time on the valuation. Although still broadly positive on the chip-maker, the broker said the stock was close to reflecting fair value.

The broker added: "We have been encouraged by the resilience of the company's licensing business, despite the significant cyclical challenges faced by its customers, but royalties clearly face a considerable slowdown in the first of this year due to the severity of the inventory correction in the wireless supply chain."

Among smaller companies, the staffing group SThree was 1p firmer at 181.5p amid speculation that Adecco, the Swiss recruiter which made an abortive approach for Michael Page International last year, was mulling a possible bid.

Singer Capital Markets said the company would meet Adecco's strategic objective, pointing out that, given its current market capitalisation of around £220m, SThree would make "a modest dent" on the Swiss group's €1bn (£941m) mergers-and-acquisitions war chest.

"Since approaching Michael Page in May 2008, sterling has weakened by 14 per cent against the euro, reducing the cost of UK domiciled companies to a European buyer," the broker said.

"With many commentators predicting euro weakness during 2009, now could be an opportune time to purchase UK assets."

The FTSE 250-listed Michael Page, which was downgraded to "sell" with a 171p target price from "neutral" with a 222p target at Goldman Sachs, was 1.25p behind at 185.25p.