Gold Futures Touch Seven-Year Highs

Sept. 22, 2003
By Myra P. Saefong, CBS.MarketWatch.com

SAN FRANCISCO (CBS.MW) -- Gold futures traded near their highest level in seven years early Monday, as comments from a key meeting over the weekend signaled more weakness in the U.S. dollar, prompting investors to buy the precious metal as an alternative.

"The statements made after the G-7 [Group of Seven] meeting certainly evoked a buying binge for foreign currencies," said John Person, head financial analyst at Infinity Brokerage Services.

Treasury Sectary John Snow stated that "a flexible currency rate is desirable for major countries or economic areas." "That alone was construed to mean the U.S. would accept a weaker dollar," Person said, and the weaker dollar has been the "catalyst" for gold, which is often seen as an alternative currency.

Gold for December delivery climbed as high as $389 an ounce on the New York Mercantile Exchange. Futures prices reached a high at $388.90 in February of this year and the high was $391.50 in August of 1996. The December contract traded more recently at $387.20, up $4.30.

The dollar was sharply weaker against the euro and yen in recent dealings, and major stock indexes lost ground, fuelling the rally in gold, which investors use as a hedge against losses in the stock market.

Comments from the G7 members underlined the central bank communities' commitment to the gold market, according to James Moore, an analyst at TheBullionDesk.com in London. Specifically, the meeting indicated the likely renewal of the Washington Gold Agreement, a 4-year-old handshake-pact among 15 central banks to set limits on each year's gold sales from sovereign vaults.

With this kind of reaction being seen in gold "on the back of a couple of unofficial comments," Moore believes "the reaction to the real renewal will see some interesting price swings.

Metals stocks move higher

Gold's strength provided a significant lift to most major metals mining shares.

Michael Dudas, an analyst at Bear Sterns raised his gold price forecast for the 2003 and 2004 to "reflect gathering momentum of macro and micro drivers to support higher realized prices."

For 2003, he raised the average forecast by $10 to $355 per ounce and by $30 per ounce to $380 per ounce in 2004.

"We believe current valuation among shares generally appears to discount a $350 gold price, an improvement from sub $320 price we estimated in early July," he said.

For now, he remains "positive" on Newmont Mining. "Current investor perceptions" of Barrick Gold could also provide some "lagged opportunities," he said.

Risks to Bear Sterns investment thesis include a reversal in recent monetary policy, commodity price deflation, a stronger U.S. dollar, and a renewal of producer hedging activity, Dudas said.

And gold prices could fall if central banks refuse to renew their sales agreement or significantly expand it, he said, adding that he doesn't expect the renewal to come during 2003. The agreement expires in September 2004.

Tracking the sector as a whole, the Philadelphia Gold and Silver Index traded up 2 percent at 97.27. The CBOE Gold Index rose 1.9 percent to 81.65 and the Amex Gold Bugs Index also added 2.4 percent to stand at 209.51.

Shares of Newmont traded up 71 cents at $41.37 and Barrick Gold added 24 cents to $20.37.

Silver climbs

Back on Nymex, silver for December delivery traded at $5.305 an ounce, up 1.3 cents.

Also on Nymex, December copper rose by 0.25 cent to 83.35 cents a pound.

December palladium fell by 75 cents to $222 an ounce and October platinum climbed by $5.70 to $702 an ounce.

As for supplies, Nymex gold inventories were unchanged at 2.73 million troy ounces as of late Friday.

Silver inventories were also flat at 107.1 million troy ounces, while copper stocks fell 920 short tons to 299,000 short tons.

Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

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