Gold provides refuge from declining dollar

By Javier Blas
Financial Times, London
Friday, September 7, 2007

http://www.ft.com/cms/s/0/8b8aa01a-5d67-11dc-8d22-0000779fd2ac.html

Gold prices jumped above $700 an ounce for the first time in 16 months on Friday as investors looked for refuge from a falling US dollar.

Robust physical demand from India, China, and other emerging countries and some investors covering previous bearish bets contributed to the price surge, traders said.

Spot gold in London hit an intraday high of $707.10 an ounce, its highest level since May 2006, as expectations of a cut in US interest rates pushed down the dollar to $1.3798 against the euro, less than a cent off its all-time low.

Gold later traded $8.5 higher at $703.7 an ounce, approaching the 26-year high of $730 an ounce reached in 2006.

Gold closed the week with a gain of 4.6 percent.

James Gutman of Goldman Sachs said, "Gold will continue to face upside pressure driven largely by the weakness in the US dollar."

He forecasts gold prices rising to $725 an ounce in the next 12 months.

Investors are betting that the US Federal Reserve will cut its main interest rate by up to 50 basis points at its September 18 meeting to cushion the US economy against the credit squeeze.

The US lost jobs last month for the first time in four years, raising fears that it might fall into recession.

Michael Lewis of Deutsche Bank in London said that gold prices could reach $740 a troy ounce on the prospect of more US interest rates cut pushing down the dollar. "There is a growing risk of the dollar weakness overshooting," he said.

A reduction in US interest rates would increase the downward pressure against the dollar, making dollar-priced gold cheaper for investors in other currencies.

Robin Bhar of UBS in London added that gold physical demand was accelerating in India, the world's largest gold consumer, China, and the Middle East. "Gold's underlying fundamentals are improving," Mr Bhar said.

Other commodities were mixed on the week, with most falling on Friday, dragged down by concerns on the US economy.

Crude oil prices approached their record high. In late London afternoon trading, Nymex October West Texas Intermediate fell 34 cents to $75.95 a barrel, but on the week made a gain of 2.1 percent.

Oil rose on concerns that the Organisation of the Petroleum Exporting Countries would keep its production unchanged at its meeting in Vienna next week, and following a larger-than-expected drop in US crude oil and gasoline inventories.

OPEC, which controls 40 percent of global oil production, has said that the demand outlook is unclear despite calls by the International Energy Agency, the industrialised countries' energy watchdog, for an increase in supply.

Nymex October heating oil jumped 4.5 percent on the week to trade at $2.1340 a gallon on Friday but Nymex RBOB gasoline lost 4.2 percent to $1.9662 a gallon.

Agricultural commodities posted weekly gains after wheat surged on Wednesday in Chicago to a record high of $8.86 a bushel. CBOT December Wheat closed the week 6.4 percent higher at $8.2275 a bushel. CBOT December corn rose on the week by 1.2 percent to $3.445 a bushel.

Base metals fell sharply during the week amid ongoing worries about the US economy. The fears increased yesterday after it was revealed that the US economy lost jobs last month for the first time in four years, raising fears that it might fall into recession.

Aluminium dropped 4.1 percent to $2,445 a tonne while copper lost 4.5 percent to $7,160 a tonne.

Zinc fell 10.7 percent to $2,779.7 a tonne and nickel lost 9.4 percent to $27,050 a tonne.

Nickel lost 9.2 percent to $27,100 a tonne. Tin dropped 4.7 per cen to $14,750 a tonne.

Stephen Briggs, metals analyst at Societe Generale, said: "So far the fundamentals are still broadly positive on the demand as well as the supply side, but threats are growing and some metals look distinctly vulnerable."

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.