Tuesday, January 8, 2008

Gold Climbs to Record as Investors Seek Alternative Asset

By Pham-Duy Nguyen

Jan. 8 (Bloomberg) -- Gold advanced to a record and energy, metals and agricultural commodities rose as a weakening dollar sparked demand for alternative assets.

Gold, copper and nickel are off to the best start since at least 1980. Crude oil gained, after reaching a record $100 last week, and corn climbed to an 11-year high. The dollar fell on concern a housing slump and turmoil in credit markets may force the Federal Reserve to cut interest rates. U.S. Treasuries and equities also declined.

``The whole economic landscape is fraught with risk and that's going to drive gold higher,'' said William O'Neill, a partner at commodity research firm Logic Advisors in Upper Saddle River, New Jersey. ``This market is going to continue to reflect a flight to quality. There's alternative-asset demand for commodities.''

Gold futures for February delivery rose $18.30, or 2.1 percent, to $880.30 an ounce on the Comex division of the New York Mercantile Exchange, after earlier climbing to a record $884.

Gold for immediate delivery rose as much as $23.12, or 2.7 percent, to $881.28 an ounce in London, the highest ever.

Countrywide Financial Corp., the largest mortgage lender, fell on the New York Stock Exchange by the most since the October 1987 stock market crash. The Standard & Poor's 500 Index had its worst start to a year since 2000. Treasuries declined as the lowest yields on two-year notes since 2004 discouraged investors from buying short-term government debt.

`Gold Is Sexy'

``Gold is acting like the currency of last resort,'' said Paul Sutherland, chief investment officer for Traverse City, Michigan-based Financial & Investment Management Group, which manages about $700 million. ``There's no place to go with that paranoid money. Gold is attracting that paranoid money. Gold is sexy to own.''

Bear Stearns Cos. Chief Executive Officer James Cayne is expected to resign and Barclays Capital Co-President Grant Kvalheim stepped down as their firms suffered losses from the collapse of the subprime mortgage market.

Citigroup Inc., the biggest U.S. bank, may be forced to write down $16 billion in the fourth quarter, Merrill Lynch & Co. analyst Guy Moszkowski said. A report showed the number of Americans signing contracts to buy previously owned homes fell more than forecast in November.

Interest-rate futures show a 70 percent chance the Federal Reserve will cut the overnight lending rate 0.5 percentage point to 3.75 percent by Jan. 30, compared with no chance a week ago.

$1,000 Forecast

``Deepening recession jitters increase our conviction in gold,'' John Hill, an analyst at Citigroup, said in a report on Jan. 6. ``We would expect strong safe-haven demand in the event of a U.S. recession and a test of $1,000 an ounce at some point.''

Barrick Gold Corp. was Hill's top pick among mining stocks for 2008. The Philadelphia Stock Exchange Gold & Silver Index rose as much as 6.1 percent to 193.78 today.

The Federal Reserve cut borrowing costs 1 percentage point to 4.25 percent in 2007, sending the dollar to $1.4967 on Nov. 23, an all-time low against the euro. Oil climbed as much as 2.6 percent to $97.54 a barrel today after touching a record $100.09 on Jan. 3.

``The U.S. dollar is weakening and oil has picked back up,'' said David Thurtell, a metals analyst at BNP Paribas SA in London. ``There are a lot of supportive reasons to buy and not many reasons to sell.''

1979 Inflation

Gold rose 31 percent last year, the biggest gain since 1979, when the price more than doubled after the Shah of Iran was overthrown, energy costs surged and the dollar slumped.

U.S. inflation was more than 13 percent when the metal last traded at record prices in 1980. U.S. consumer prices increased 0.8 percent in November, the most in more than two years. Inflation in the 13-nation euro region accelerated to 3.1 percent in November, the fastest since 2001, according to Eurostat.

Gold will probably average $800 an ounce this year, compared with $696 last year, according to the median estimate of 37 traders, analysts and investors surveyed by Bloomberg News last month.

Gold was the second-best performing metal after lead on the UBS Bloomberg Constant Maturity Commodity Index last year. The index of 26 commodities climbed 22 percent.

Investment in the StreetTracks Gold Trust, the largest exchange-traded fund backed by bullion, reached a record 630 metric tons on Jan. 4. That's about a quarter of annual mine production.

Production Decline

Global output fell to a 10-year low of 2,477 tons in 2006, according to the London-based research company GFMS Ltd. Supply from South Africa declined 7.5 percent to the lowest since 1922 as companies were forced to dig deeper and pay workers more.

Gold's 5.1 percent gain so far this year may be overdone, some analysts said. The 14-day relative index for gold futures touched 73 today. A reading above 70 generally means the price is headed lower.

Hedge-fund managers and other large speculators increased their net-long positions in New York gold futures in the week ended Jan. 1, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 199,438 contracts, up 8 percent from a week earlier, commission data show.

``The easy money has been made in gold,'' said Sutherland of Financial & Investment.

Forecast Decline

Goldman Sachs International Group Inc. economist James Gutman, who is tied as the most-accurate analyst in the London Bullion Market Association's 2007 gold-price forecast, wrote in a Dec. 11 report that gold will drop to $790 in six months and $750 in 12 months.

``As the U.S. dollar gains strength once again, the price of gold will, in turn, likely decline,'' he wrote in the report. The bank recommended selling December 2008 gold futures. The bank was the second-largest holder of the StreetTracks Gold Trust ETF, according to a Sept. 30 filing with the Securities and Exchange Commission.

Silver for March delivery rose 52.5 cents, or 3.4 percent, to $15.815 an ounce. The metal rose 15 percent last year.

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