Gold prices hit $1,000 milestone

Precious metal hits key level on fears about economy and further weakness in the dollar. -- March 13, 2008
After weeks hovering just below $1,000, gold passed the key psychological mark Thursday.

NEW YORK (CNNMoney.com) -- Gold prices touched the $1,000 milestone for the first time Thursday as the dollar plunged amid nagging fears about the health of the U.S. economy.

After weeks of flirting with the key psychological mark, COMEX gold for April climbed to $1,000 an ounce in morning floor trading. Prices later pared their gains and were most recently up $16.60 to $997.10 an ounce.

Sending prices higher were another drop in the dollar, looming Federal Reserve interest rate cuts, and rising inflation.

"Supply and demand is not really the driver of gold prices," said UBS metal strategist Robin Bhar. "This is about global financial stresses."

Falling dollar. The dollar hit a 12-year low against the yen and retreated to yet another record low versus the euro Thursday. As the price of gold appreciates compared to the dollar, investors pour money into the commodity in hopes that their gold will maintain some value.

"Perhaps some investors have reached a point where there is nothing better than a hard, physical asset like gold," Bhar said.

Interest rate cuts. Many economists expect the Fed to cut interest rates by one-half of a percentage point when the U.S. central bank meets next Tuesday. As interest rates continue to dip, and funds tied to interest rates like money market accounts lose their yield, investors look to an asset that will provide a stronger return on their investments.

"Gold is a non-interest yielding commodity, so lower interest makes gold a more attractive commodity," said Bhar.

Rising inflation. When the central bank slashes rates, inflation rises as the dollar loses its value. As the Fed has cut rates to 3%, prices have risen at an annual rate of 2.5%, according to a U.S. Labor Department reading.

Traditionally, investors put money into government bonds and TIPS to ward off inflation. But recently bonds have provided historically low yields, and many have now transferred their funds into gold.

"It may be that we've reached a point that not even those instruments are adequate insurance against inflation," said Bhar.

But historically, gold has failed to keep pace with inflation. When the economy ends its current downturn, gold prices should eventually fall, as they did 28 years ago. After hitting the $847 mark in January 1980, gold futures fell 70% to $253 in August 1999.

Still a long way to go. Even so, gold may continue to soar. The shiny commodity has long been considered a safe haven for investors worried about the economy.

"The current environment is such that the doom and gloom scenario plays right into investors' hands," said Bhar, who believes that gold prices will continue to rise as long as investors are worried about an economic recession.

"Though forecasts point to no recession, hedge fund clients are quite fearful right now."

And 1980 is proof that gold prices could continue to go up. Though gold has never been traded at a higher price, the $847 level in 1980 would be worth $2,170 in today's money, more than double the current price of gold.