Gold Futures Rise to Record $958.40 on Inflation Concerns

article date Feb-21-2008 - By Pham-Duy Nguyen and Claudia Carpenter
Feb. 21 (Bloomberg) -- Gold futures surged to a record $958.40 an ounce as a slumping dollar and soaring commodity costs boosted the appeal of the precious metal as an inflation hedge. Silver rose to the highest since 1980.

Gold has more than tripled in price during a seven-year rally. The metal jumped 31 percent in 2007 as the Federal Reserve initiated a series of interest-rate cuts aimed at bolstering the economy, while inflation rose at the fastest pace since 1990. Fed policy makers intend to keep rates low ``for a time,'' minutes from their meetings showed yesterday.

``Inflation is screaming,'' said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. ``Lowering rates is only going to make inflation worse and force people into commodities. The funds are piling into gold.''

Gold futures for April delivery rose $13.20, or 1.4 percent, to $951 an ounce at 12:59 p.m. on the Comex division of the New York Mercantile Exchange. The most-active contract topped $950 for the first time in electronic trading overnight.

Silver futures for March delivery climbed 9 cents, or 0.5 percent, to $17.85 an ounce. The price earlier reached $18.075, the highest since December 1980. Before today, silver gained 19 percent this year, while gold rose 12 percent.

The deepest housing slump in 25 years and billions of dollars in writedowns related to the collapse of subprime- mortgage debt spurred the Fed in September to begin cutting rates for the first since 2003 to avert a recession.

Interest-Rate Futures

The federal-funds rate is at 3 percent, down from 5.25 percent in mid-September. Gold has gained 31 percent since Sept. 18, when the central bank started cutting borrowing costs. Interest-rate futures show a 92 percent chance the Fed will lower the benchmark rate to 2.5 percent by March 18, compared with a 70 percent chance a week ago.

Last year, consumer prices rose 4.1 percent, the most since 1990. The dollar index, a measure against a weighted basket of the yen, euro, pound and three other major currencies, fell to 74.484 on Nov. 23, the lowest since the currency index started trading in 1973.

``In a negative interest-rate environment, gold does really well,'' said James Vail, who manages $1.5 billion in natural- resources funds at ING Investment Management Co. in New York. ``Gold just represents a very easy way to store value. The dollar continues to worry people.''

The dollar index traded as low as 75.57 today. The UBS Bloomberg Constant Maturity Commodity Index climbed as much as 1.3 percent to 1,465.15, the highest ever. Platinum, soybeans and corn also reached records today. Crude oil yesterday soared to $101.32 a barrel, the highest ever.

StreetTracks
Investment in the StreetTracks Gold Trust, the biggest exchange-traded fund backed by bullion, has risen 0.5 percent to 631 metric tons this year. It reached a record 653 metric tons on Jan. 14.

Investors put a record $8.1 billion into the gold market in the fourth quarter, according to figures from the World Gold Council. The data showed $1.96 billion invested in ETFs, which totaled 869 metric tons as of Dec. 31. Global mine production dropped 1 percent to 2,447 metric tons last year, the council said.

``Gold clearly has benefited amid a new investment-driven phase,'' John Hill, a metals and mining analyst at Citigroup Investment Research, said in a report on Feb. 14. The firm expects gold to average $900 this year.


More than half of the 28 analysts who participated in the London Bullion Market Association's annual survey forecast gold's high will exceed $1,000 this year.
-asr: ait may be just 55% of anaysts , these predictions has less than 60% success rate as per bloomberg i read some where in this site itself.

Mine Output Slides

Gold touched a 20-year low of $253.20 in July 1999. The price has climbed as output from mines eased and increasing wealth in countries such as China and India boosted demand.

Last year, global mine production dropped to an 11-year low, researcher GFMS Ltd. said. Blackouts in South Africa have disrupted mine output this year. China and South Africa are the world's largest gold producers.


Chinese demand rose 23 percent in 2007 as the country replaced the U.S. as the second-biggest buyer of the metal, World Gold Council data showed. Demand from India, the largest buyer, rose 7 percent.

``We could see $1,100 by the third quarter,'' said Tobias Merath, a commodities analyst at Credit Suisse Group in Zurich. ``We've had production outages in South Africa. Jewelry demand is increasing in Asia due to increasing living standards.''

Gold futures climbed to $873 in January 1980, when the inflation rate was 14 percent. That record stood for 28 years. In 1980 dollars, $950 is equivalent to $2,486 today, according to an inflation calculator on the Web site of the Federal Reserve Bank of Minneapolis.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net; Claudia Carpenter in London at ccarpenter2@bloomberg.net