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Tuesday, September 8, 2009

Gold Rallies to 18-Month High on Dollar’s Weakness, Inflation

Gold rose to the highest price since March 2008, passing $1,000 an ounce, while silver climbed to a 13-month high as a weaker dollar and concern that inflation may accelerate boosted the appeal of precious metals.

Bullion for December delivery surged to $1,009.40 on the Comex division of the New York Mercantile Exchange, taking this year’s gain to 14 percent. Gold futures, which reached a record $1,033.90 in March 2008, are set for a ninth yearly gain. Crude- oil futures and all six industrial metals on the London Metal Exchange rallied as the Dollar Index lost as much as 1.1 percent to more than an 11-month low. Raw materials typically move inversely to the U.S. currency.

Governments have cut interest rates and boosted spending to fight the worst recession since World War II, spurring investors to buy bullion as a hedge against potential inflation and debasement of currencies. Gold, silver and palladium holdings in exchange-traded funds have advanced to records.

“We don’t see any immediate recovery in the dollar and gold is one of the better alternatives,” said Bernard Sin, head of currency and metals trading at bullion refiner MKS Finance SA in Geneva. “From here, the next technical level is $1,040, and at the rate it’s going it might not be difficult. There’s a lot of new money coming into gold.”

Gold last traded at more than $1,000 on Feb. 20, the first time the metal had reached that price since March 2008. Futures then retreated as low as $865 on April 6. The metal added 0.9 percent to $1,005.70 at 8:35 a.m. in New York. Bullion for immediate delivery surged as high as $1,007.70 in London and was last at $1,005.45.

Producers Climb

“There’s not many good options for investors to hedge against a declining dollar and rising inflation,” Hwang Il Doo, head of trading with KEB Futures Co., said today from Seoul. He expects gold will rise to $1,100 an ounce by year’s end.

The metal’s advance boosted producers. Newcrest Mining Ltd., Australia’s largest gold-mining company, gained as much as 5 percent to A$34.18. Zijin Mining Group Co., China’s largest producer, rose as much as 10 percent in Hong Kong.

Lead, which has paced this year’s gains in metals, rose as much as 5.7 percent to $2,484 a metric ton, the highest level since May 2008. The metal’s 149 percent rally this year came after China, the world’s largest supplier of the metal, closed smelters and investigated lead-poisoning cases. Copper has more than doubled and traded at $6,505.75 a ton, the highest in more than a week. Goldman Sachs Group Inc. today raised its forecasts for industrial metals as a recovery in the world economy reduces spare capacity.

Haven Investment

Gold may be cementing its status as a haven investment as governments seek to flood the financial system with cash in an effort to haul the global economy out of a recession.

“The reasons to own gold as an investment make sense,” Sydney-based Greg Gibbs, a Royal Bank of Scotland Group Plc strategist, said in advance of the metal’s gain to $1,000 today. “It is a hedge against policy makers losing control of fiscal and quantitative monetary policies.”

The Dollar Index, a six-currency gauge of the dollar’s value, declined for a third day today. The measure has slipped 5 percent this year.

Other precious metals have outperformed gold this year. Silver for December delivery in New York gained as much as 3.5 percent to $16.86 an ounce today, the highest since August 2008, and was last at $16.725. It has climbed 48 percent this year.

Silver Ratio

An ounce of gold now buys about 60 ounces of silver in London, the least since August 2008, according to Bloomberg data. That’s down from a high of 84.4 on Oct. 10, which was the most since March 1995.

Palladium for December delivery in New York rose 1 percent to $299 an ounce, the highest price in a year. The best performing precious metal this year has gained 58 percent in 2009. Platinum for October delivery added 2 percent to $1,284.80 an ounce, increasing its gain this year to 37 percent.

U.S. President Barack Obama has increased U.S. marketable debt to an unprecedented $6.78 trillion as he borrows to spur the world’s largest economy. Goldman Sachs predicts that the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010.

Crude-oil futures, used by some investors as an inflation- outlook guide, have soared 57 percent this year. Consumer prices will rise 0.9 percent in advanced economies next year compared with 0.1 percent in 2009, the International Monetary Fund forecast in July.

ETF Records

Gold at more than $1,000 may attract more investors seeking to take advantage of the longest advance in the metal’s price in 60 years. Assets in some of the industry’s largest exchange- traded funds have reached all-time highs the past few months.

The SPDR Gold Trust, the biggest ETF backed by the metal, reached a record 1,134.03 metric tons on June 1. The fund, which held 1,077.63 tons as of Sept. 4, has overtaken Switzerland as the world’s sixth-largest gold holding. Bullion held in ETF Securities Ltd.’s exchange-traded products added 6.640 ounces to a record 8 million ounces (248.8 tons) yesterday, its Web site showed.

The company’s silver holdings increased 0.9 percent to an all-time high 20.516 million ounces, while palladium assets rose 1 percent to a record 456,953 ounces.

Investors should avoid buying gold at $1,000 an ounce because investment demand is less compared with earlier this year, UBS AG analyst John Reade wrote in a note today. UBS maintained its one-month and three-month forecasts for the metal at $950 and $1,000 an ounce respectively.

“We are unconvinced that all the ingredients are in place for a sustained surge higher,” Reade said. “Only if we see much stronger and more broad-based buying in gold will we change our view that this is a profit-taking opportunity rather than a signal to buy gold.”

Disclosure I am long GLD Shares.

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