In These New Times

Gold Trades Near Record, May Gain on Dollar Weakness, Inflation

By Kim Kyoungwha

Oct. 7 (Bloomberg) — Gold traded near a record after investors bought the metal to hedge against a declining dollar and pickup in inflation.

Bullion, which typically moves inversely to the U.S. currency, surged to an all-time high yesterday after Australia unexpectedly raised interest rates, hurting the dollar. The metal has risen 18 percent this year as governments boost spending to pull their economies out of recession, sparking speculation rising money supply will debase paper currencies.

“The uptrend remains intact given that rate hikes to come show inflation will build up, fanning demand for gold,” said Kim Jae Jun, a trader at Eugene Investment & Futures Co. Today’s move was a “minor consolidation,” and gold will rise to $1,100 an ounce by the end of 2009, Kim said from Seoul.

Gold for immediate delivery traded at $1,039.10 an ounce at 12:45 p.m. in Singapore, little changed from yesterday’s record of $1,043.78. The metal fell as much $5.20, or 0.5 percent, and gained as much as 1 cent.

Surging gold prices are a signal that investors are buying metals to hedge against declines in currencies, according to former Federal Reserve Chairman Alan Greenspan. The gains for precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” Greenspan said last month.

‘Inverse Dollar Play’

“Gold is an inverse dollar play,” Mark Pervan, head of commodity research at ANZ Banking Group Ltd., wrote in a note today. The dollar traded at $1.4687 per euro in Tokyo from $1.4722 in New York yesterday, when it reached $1.4762, the weakest level since Sept. 24.

Newcrest Mining Ltd., Australia’s biggest gold-mining company, paced producers’ gains, rising as much as 7.5 percent to A$35.40 on the Australian stock exchange. Lihir Gold Ltd. added as much as 6.1 percent to A$3.15.

“There’s talk of inflation re-emerging and continuing weakness in the U.S. dollar, which suggest the gold price may well continue to climb higher,” said William Seddon, who helps manage about $300 million at White Funds Management in Sydney.

Crude-oil futures, used by some investors to forecast trends in inflation, have soared 60 percent in New York this year. The “fragility of the U.S. dollar” was also supportive of the crude price, said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney.

Dollar’s Decline

The Dollar Index, a gauge of the dollar’s value against six major currencies, has fallen 15 percent since peaking this year in March. Still, the index gained today after Kansas City Fed President Thomas Hoenig said yesterday that raising interest rates wouldn’t derail the U.S. economic recovery.

Australia boosted the overnight cash rate target yesterday by a quarter of a percentage point to 3.25 percent, becoming the first Group of 20 nation to raise interest rates since the height of the global financial crisis. Only one of 20 economists surveyed by Bloomberg News had forecast the decision.

“The Reserve Bank of Australia’s rate hike renewed expectations that the global economy is recovering firmly,” said Stefan Graber, an analyst with Credit Suisse Group in Singapore. “Our medium-term outlook on gold remains constructive as we expect the dollar to continue weakening.”

Gold held in the SPDR Gold Trust, the biggest exchange- traded fund backed by the metal, reached a record 1,134 metric tons on June 1 and was at 1,098.07 tons on Oct. 5. The fund has passed Switzerland as the world’s sixth-largest holding.

U.S. Economy

President Barack Obama has increased the U.S. marketable debt to an unprecedented $6.94 trillion as he borrows to combat the recession. The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, according to government figures.

Government of Singapore Investment Corp., manager of more than $100 billion, warned last month there was a greater risk of rising inflation after “substantial” stimulus programs from governments around the world, according to Chief Investment Officer Ng Kok Song.

A “sniff of inflation is already in the air,” Newmont Mining Corp. Chief Executive Officer Richard O’Brien said Oct. 2. Shares in the top U.S. gold producer, which surged as much as 8 percent yesterday, have gained 42 percent over the past year.

To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net