Gold hits record near $1,150/oz as dollar slips

Wed Nov 18, 2009 5:13am EST

By Jan Harvey

LONDON (Reuters) – Gold hit a fresh record high near $1,150 an ounce on Wednesday, boosting precious metals across the board, as a dip in the dollar index added to momentum buying as prices broke through key technical resistance levels.

In non-U.S. dollar terms, gold also climbed, hitting multi-month highs when priced in the euro, sterling and the Australian dollar.

Spot gold hit a high of $1,147.45 and was at $1,146.05 an ounce at 0948 GMT, against $1,141.50 late in New York on Tuesday.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange also hit a record $1,148.10 and were later up $7.10 at $1,146.40 an ounce.

“Yesterday the market took a breather and tested below $1,130 very quickly, (but) a few physical related bargain hunters were lined up to grab the dip,” said Afshin Nabavi, head of trading at MKS Finance in Geneva.

The market is being underpinned by fresh interest in gold from the official sector, he said, after a recent major bullion acquisition from India and smaller buys by the central banks of Mauritius and Sri Lanka.

The acquisitions underlined gold’s appeal as a portfolio diversifier, especially in an environment where further dollar weakness was expected, analysts said.

The dollar eased back on Wednesday from its biggest rise in three weeks in the previous session, as traders awaited U.S. inflation data due at 1330 GMT.

The dollar index, which measures the U.S. currency’s performance against a basket of six others, was down 0.37 percent, while the euro/dollar exchange rate firmed.

Other commodities also climbed, with oil rising back toward $80 a barrel and copper to 13-1/3 month highs near $7,000 a tonne. Both are being lifted by the weak dollar.

Hot commodities

The big question about resources: Is it too late to invest? Short answer: Nope. And it’s easier than ever to get into the game.

By Brian O’Keefe, senior editor

(Fortune) — Back in 2001, the executives running Australian mining giant BHP Billiton sensed that China’s economic growth was gaining critical mass. So they commissioned a study on how the country’s rapid industrialization might affect the global markets for copper, coal, iron ore, oil – all the stuff that the company pulls out of the earth and sells.

“The results were quite – well, ‘outrageous’ is probably the right word,” CFO Alex Vanselow told me when I visited BHP’s headquarters in Melbourne a few months back. “Because we didn’t believe it. We thought something must be wrong. If our models were right, the pressure China would put on the world would be tremendous.”

But the more they tinkered with their models, the more unbelievable the results became. The fast-growing per-capita income of China’s billion-plus people pointed toward a massive thirst for raw materials. When the researchers added India’s potential for growth – and its own billion-plus population – the numbers got even more extraordinary. And when they factored in the industry’s inadequate investment in new production capacity, they concluded that over the next two decades there would be a historic demand-driven boom in the resources world.

Today, of course, the commodities boom that the BHP (BHP) study anticipated is in full swing – and impossible to ignore. You see it every day in the $100-plus it now costs to fill up your SUV. Or the 39% increase in the cost of electricity over the past eight years. Or the fact that you’re paying 20% more for that box of pasta than you were a year ago.

As painful as all those rising prices can be for consumers, the bull market in raw materials has proved to be an awesome investment opportunity. Over the past five years the S&P 500 has had a total return of 59%. But over the same period, the diversified Dow Jones-AIG Commodity index has risen some 110%, and the S&P GSCI Commodity index, another broad measure, has jumped 141%. The price of gold has more than doubled, and crude oil and copper have soared more than fourfold. If you were prescient enough to go long on rice on New Year’s Day, you’ve already seen a return of 33% this year.

No wonder, then, that money is flooding into resource markets. According to Gresham Investment Management, institutional investors like pension funds and endowments had $175 billion in commodities at the end of 2007, up from $18 billion in 2003. Just as predictably, Wall Street has rushed out a flurry of new products geared toward individual investors.

Inflation Fears To Support Gold Once Stocks Stabilize

Gold may be poised for further gains due to growing inflation fears, especially once equity markets stabilize and with the U.S. Federal Reserve speeding the pace of easing its monetary policy, traders and analysts said.

One observer compared the Fed’s recent rate cuts to a doctor administering medicine in an attempt to save the life of a patient – in this case the economy – before worrying about possible side effects, such as inflation.

As it is, the gold was already drawing some buying even when it was hit earlier in the week by long-liquidation pressure from investors needing to raise cash as stocks sold off.

“Silver and gold have done a good job of holding together as the stock indices fell apart,” said Ira Epstein, chief executive with Ira Epstein & Co. Futures. “They’ll do a phenomenal job to the upside once they believe the economy is on better footing. The rational for that is all these rate cuts will lead to inflation.”

Precious metals are likely to draw safe-haven buying due to some of the uncertainties in the financial and credit markets, said Gijsbert Groenewegen, managing partner with Gold Arrow Capital Management.

“On the other hand, precious metals have also been an inflation hedge,” he continued. “If you look at food and energy prices, there is inflation. Wheat is at all-time highs. Look at corn. You’re having an acceleration of the world population having access to ‘better foods.'” With oil at historically high prices, demand for biofuels has added to rallies in food commodities such as corn and sugar, he added.