Gold prices scaled unprecedented heights Monday, hitting record territory alongside crude oil as investors looked for a safe place to park their money while the U.S. economy and greenback struggle.
Gold futures jumped to $992 (U.S.) an ounce on the Comex division of the New York Mercantile Exchange, pushing to within a whisper of the milestone $1,000 level as the U.S. dollar fell to its lowest ever against the euro. Bullion eventually closed Monday's session at $984.20, up $9.20. Gold prices rallied nearly 32 per cent in 2007 and have shot up more than 15 per cent this year.
Not to be outdone, crude oil futures surged to an unprecedented $103.95 a barrel in New York on Monday. The gains sent the benchmark price of oil above an inflation-adjusted historical record reached 28 years ago. Oil peaked at $39.50 a barrel in April, 1980, which translates into $103.76 a barrel in today's money.
Matthew Turner, a precious metals analyst at Virtual Metals Consulting Ltd. in London, said a struggling greenback and the raft of weak U.S. economic data are supporting gold's gains.
“As long as the U.S. dollar is falling and the economic news from the U.S. stays this bad, gold could go much higher,” he said in an interview.
Bullion started to regain its lustre last year, as investors flocked to it for its safe-haven qualities, Mr. Turner said. The ongoing financial crisis has also boosted the yellow metal's appeal
“The nature of the financial crisis has been a collapse of trust in the banking sector, and if you can't trust financial intermediaries, then metal dug out of the ground make sense again,” he said. “This has been the perfect crisis for gold.”
A report on manufacturing released Monday suggested the U.S. economy is already in a recession, while another showed that construction spending plummeted. The negative news, which pushed the U.S. greenback to a record low against the euro on Monday, is expected to drive commodity market trading until at least March 18, when the U.S. Federal Reserve is to release its next interest rate decision.
“Right now it is all doom and gloom, and that is what metals thrive on,” said Jon Nadler, a senior analyst at Kitco Bullion Dealers in Montreal.
The confluence of a weaker U.S. dollar, higher crude oil prices, and further subprime woes are “playing right into the hands of a speculative metals trader,” Mr. Nadler said. “This is an anxiety premium that is being built into this by the convergence of all these news flows.
Hedge funds, he said, are “throwing tons and tons of money at these markets, mostly for a lack of better alternatives. So that is snowballing and to some degree actually distorting the fundamentals.”
Mr. Nadler said gold could rise to $1,010 and $1,080, but warned that the “risk of a correction has risen exponentially.” Some traders believe that bullion's runup will ease after the Fed's next meeting.
Bullion's run toward $1,000 is unfolding as the annual Prospectors and Developers Association of Canada Convention (PDAC) takes place in Toronto. Although Canadian gold stocks have lagged the jump in gold prices, the S&P/TSX gold subindex was leading the gains on Monday.
Still, shares of Canadian junior miners have remained on ice when compared with gold's massive run, Mr. Nadler said. “PDAC euphoria notwithstanding, the problem is that they just have not done enough. No matter how good the gold story is, sluggish global stock markets, fluctuating currency markets and management risk are all still factors to contend with.”
Gordon Stothart, the chief operating officer of Iamgold Corp., said higher gold prices will add “some very significant value to our bottom line” in the form of higher revenue.
Rising bullion grants the Toronto-based company the “financial wherewithal” to develop projects, he said. “It provides some additional impetus to push our projects as quickly as possible and try to bring them online so we can take advantage of the high gold price.”
However, the price spike can also translate into higher costs and increasing unease in the investment world, Mr. Stothart said.
He expects gold prices to remain elevated: “Gold should hang in at a very high price ... a lot of people are moving away from the U.S. dollar currency and locking into something solid to help replace it.”
Jeff Nichols of American Precious Metals Advisors said that because gold's runup is being driven by investment buying, prices are bound to keep on climbing.
“Don't be surprised to see gold trade up to $1,100 or even $1,200 before year-end 2008,” he said. “And – with the right confluence of economic and geopolitical developments – we could see gold spike to $1500 or even $2000 in the next few years.”
With a file from reporter Virginia Galt.
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