Gold Jumps to Record as Inflation Outlook Fuels Investor Demand

Oct. 6 (Bloomberg) -- Gold rose to a record on speculation that inflation will accelerate and erode the value of the dollar, boosting the appeal of the precious metal for investors seeking to preserve their wealth.

Gold futures climbed as high as $1,038 an ounce in New York, topping the previous record of $1,033.90 in March 2008. The spot price headed for a ninth straight annual gain, the longest rally since at least 1948. The dollar fell as much as 0.6 percent against a basket of six major currencies.

“Gold is acting like the ultimate currency,” said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California. “Central banks are following the same monetary course and trying to stimulate and inflate their way back to growth. Everyone’s concerned about the dollar, but it’s not like you can hate the dollar and fall in love with the euro or the yen.”

Gold futures for December delivery climbed $17, or 1.7 percent, to $1,034.80 an ounce at 9:36 a.m. on the Comex division of the New York Mercantile Exchange. Prices may reach $1,400 within six months, Hanlon said. Gold for immediate delivery in London gained as much as 1.9 percent to a record $1,036.60. The metal gained 17 percent this year.

Federal Reserve Chairman Ben S. Bernanke said Sept. 15 that the worst U.S. recession since 1930s had probably ended, and billionaire investor Warren Buffett said his company was buying equities. Central banks lowered borrowing costs and the Group of 20 nations has pledged about $12 trillion to revive economic growth, leading to record inflows in some of the gold industry’s largest exchange-traded funds.

‘Just Begun’

“Gold has just begun its ascent,” said John Brynjolfsson, the chief investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo, California. “As central banks print more and more money, the private demand for gold as an investment and inflation hedge is destined to grow. It’s pretty clear that gold will be at $2,000 by 2012, and it could happen a lot faster.”

Expectations of higher consumer prices are building. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for inflation, widened to 1.84 percentage points from almost zero at the end of 2008. It averaged 2.2 percentage points in the past five years.

“Even though the current inflation rate is low, the risk of a blowup in inflation in the future is becoming higher all the time,” said Adam Farthing, Deutsche Bank AG’s head of metals trading in Asia. “Gold is pricing that in.”

Metal Projection

Farthing projected the metal will reach $1,150 by the end of the year.

U.S. President Barack Obama increased the nation’s marketable debt to an unprecedented $6.78 trillion as he borrows to spur the world’s largest economy. Goldman Sachs Group Inc. predicts the country will sell about $2.9 trillion of debt in the two years ending next September.

“Many are expecting gold to trade at $1,050 an ounce within the next few weeks,” said Miguel Perez-Santalla, a Heraeus Precious Metals Management sales vice president in New York. “They are talking about this on the back of hyperinflation. Investment money is the driver.”

Gold held in the SPDR Gold Trust, the biggest ETF backed by the metal, reached an all-time high of 1,134 metric tons on June 1 and was at 1,098.07 tons yesterday. The fund has passed Switzerland as the world’s sixth-largest gold holding.

Consumer Prices

U.S. consumer prices will expand 1 percent this quarter and 1.8 percent in each of the following two quarters, according to the median estimate of 49 economists surveyed by Bloomberg.

Central banks’ net gold sales may drop to 16 tons this year, 93 percent below last year and the lowest since 1988, researcher GFMS Ltd. said Sept. 15. That, combined with futures trading regulation, will support demand for gold, Deutsche Bank’s Farthing said.

The U.S. Commodity Futures Trading Commission has tightened trading rules and pushed enforcement of position limits amid concern that speculation drove commodity prices to records last year. So far, new and anticipated limits have affected the largest agricultural, natural-gas and broad-based commodity funds in the U.S.

“There’s definitely switching going on out of energy and agricultural commodities into gold,” Farthing said.

Other precious metals have outperformed gold this year.

Silver Futures

Silver futures for December delivery advanced 3.8 percent to $17.155 an ounce on the Comex. The metal climbed to a 13- month high of $17.69 on Sept. 17 and is up 52 percent this year.

An ounce of gold now buys about 60.3 ounces of silver in London, according to Bloomberg data. That’s down from a high of 84.4 ounces on Oct. 10, which was the most since March 1995.

Palladium futures for December delivery rose 70 cents, or 0.2 percent, to $304 an ounce. The best-performing precious metal this year has gained 61 percent in 2009 on expectations for a revival in auto demand.

Platinum futures for January delivery jumped $10.70, or 0.8 percent, to $1,312.50 an ounce in New York, increasing their gain for the year to 39 percent. Automakers account for about 60 percent of platinum and palladium use.

Crude-oil futures, used by some investors to forecast inflation, have soared 60 percent this year in New York.