February 23, 2005
Claudia Carpenter
Bloomberg
Business Day
GOLD may rise for a third week, on expectations that a drop in the dollar will spur inflation, boosting demand for the metal as a hedge, a Bloomberg survey of 48 traders, investors and analysts shows.
Thirty-six respondents surveyed from Melbourne to New York on Thursday and Friday advised buying gold, the most bullish sentiment in the survey since April 30.
Some investors buy gold when inflation erodes the value of assets such as bonds or stocks. Five participants recommended investors sell the precious metal, and seven were neutral.
Gold, which is sold in dollars, rose 1,5% in New York last week as declines in the value of the dollar against the euro boosted the metal’s appeal as an alternative asset. The dollar and bonds fell on Friday after the US labour department reported the biggest rise in producer prices since 1998.
Inflation “both hurts and helps us”, Jack Thompson, vice-chairman of Toronto-based Barrick Gold, the world’s third-biggest gold producer, said last week. “It hurts on the cost of production but it helps us on the price side.”
Gold futures for April delivery rose $6,40 to $428,40/oz last week on the Comex division of the New York Mercantile Exchange, after gaining 1,5% the previous week.
Trading in New York was closed yesterday for the US Presidents Day holiday.
“This may be the start of a move back towards $450/oz over the next few months,” said Daniel Hynes, an analyst at Australia & New Zealand Banking Group in Melbourne. Gold reached a 16-year high of $458,70 on December 2 last year.
In London, gold for immediate delivery was down 0,1%, to $426,90 in early morning trade.
The majority of gold investors and analysts have correctly forecast the direction of gold prices in 26 of the 43 weeks since the Bloomberg survey began, or 60% of the time.
US producer prices rose 0,8% in January, excluding food and energy, the labour department said on Friday.
Prices rose 0,2% in December. Consumer prices, which the government will report tomorrow, probably rose 0,2% last month, based on the median estimate in a separate Bloomberg survey.
“Inflation makes the dollar worth less, so gold will continue to rise if inflation increases,” said Stuart Flerlage, managing principal of Brownstone Advisers.
US Federal Reserve chairman Alan Greenspan signaled last week that the central bank would keep boosting interest rates to curb inflation and bolster the dollar, spurring a drop in gold for the first trading session in six.
Greenspan told congress’s financial services committee that rates still were “fairly low” even after six quarter-point increases since June last year.
“Inflation has already crept into commodity prices and will continue to until the Fed assumes a more neutral bias with respect to interest rates,” Flerlage said.
The dollar has dropped for three consecutive years against the euro and the yen. So far this year, gold has dropped 2,3% and the US currency has climbed 3,7% against the euro.
“I do believe a major up-leg in gold will take place when the market realises the Fed is going to have to remain behind the inflation curve due to the tremendous amount of leverage built up in the US economy,” said Gregory Orrell, president of Orrell Capital Management.
Gold rose 5,4% last year as the dollar fell to a record against the euro on concerns that more dollars might have to be converted to other currencies to pay for imports. The dollar last week had its biggest drop against the euro in two months.
The greenback’s drop last week was “a key development that has helped to confirm a technical bottom in April gold at the $411,50 low” on February 9, said Tim Evans, an analyst in New York at IFR Markets.
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