Gold hits record on hedge demand

Date: Thursday, December 3, 2009
Author: The Sydney Morning Herald

Gold surged to a record for a second straight day as investors stepped up purchases to protect their wealth against currency depreciation. Silver also gained.

Gold futures touched an all-time high of $US1218.40 an ounce in New York and bullion priced in sterling, euros and Swiss francs also set records. Central banks, pension funds and individuals have bought gold as a hedge against potential currency debasement and inflation. The precious metal is climbing "like there is no tomorrow," David Thurtell, an analyst at Citigroup, said in a report.

"We bought our gold in foreign-currency terms rather than in US dollar terms, for we were convinced that the world was turning its back upon fiat currencies," said Dennis Gartman, an economist, hedge-fund manager and the editor of the Gartman Letter in Suffolk, Virginia.

Gold futures for February delivery rose $US12.80, or 1.1 per cent, to $US1213 an ounce on the New York Mercantile Exchange's Comex unit. In London, gold for immediate delivery reached a record $US1217.23 an ounce.

"Gold will go up, as will other commodities," Mark Mobius, the chairman of Templeton Asset Management said. "It's basically the devaluation of currencies, which is ongoing and will be ongoing for many years to come."
Low interest rates

The Federal Reserve has kept benchmark US interest rates close to zero per cent since December 2008 in a bid to revive lending after the worst financial crisis since World War II. The European Central Bank's main lending rate is 1 per cent and the Bank of England's rate is at 0.5 per cent.

Fed officials acknowledged this month that the record-low borrowing costs might fuel "excessive" speculation in financial markets and possibly dislodge expectations for low inflation.

Commodity funds pulled in more than $US1 billion in investments for a second straight week in the seven days to Nov. 25, EPFR Global said yesterday. That pushed 2009 inflows to $US14.6 billion, the Cambridge, Massachusetts-based researcher said.

Ian Henderson, who manages $US5 billion at JPMorgan Chase said he's adding to his gold position because of "the momentum behind it." A "sharp correction" may take place if the impetus fades, he said in an interview yesterday.

The US Dollar Index, a six-currency gauge of the greenback's value, gained as much as 0.4 per cent today after dropping 0.8 per cent in the previous two sessions. The index has dropped 8.2 percent this year as gold rallied 37 per cent.

Forecast increased

Goldman Sachs Group yesterday raised its forecast for average gold prices in 2010 by 14 per cent to $US1099 an ounce. Futures have averaged about $US962 this year as prices head for the ninth straight annual gain.

Governments in emerging markets have been adding gold to their reserves while the biggest holders haven't been selling. The European Central Bank reported today that no central bank sold gold last week.

Since the end of September, India, Mauritius and Sri Lanka bought more than half of the 403.3 metric tons of gold that the International Monetary Fund plans to sell to bolster its balance sheet and boost lending to low-income nations. Some analysts have speculated that China might buy part or all of the rest.

China should increase bullion reserves to 6000 tons in the next three to five years, the China Youth Daily said on November 30. The report cited Ji Xiaonan, the chairman of the supervisory committee at the state-owned Assets Supervision and Administration Commission. China has lifted its stockpile to 1054 tons since 2003.

Investor holdings rise

Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, increased by 0.61 ton to 1130.6 tons as of yesterday, according to the company's web site. The fund's holdings reached a record 1134 tons on June 1.

Among other precious metals traded in New York, silver futures for March delivery rose 11.5 cents, or 0.6 per cent, to $US19.325 an ounce. Earlier, the most-active contract touched $US19.47, the highest price since July 2008.

Gold's gains may be limited after rallying 14 per cent in November, the biggest monthly increase in a year. The 14-day relative strength index for gold futures has been above 70 since Nov. 13, a signal that prices may decline in the short term.