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Gold has biggest annual gain since 2002 on dollar's decline

Gold had its biggest annual gain since 2002 as declines in the dollar spurred demand for the metal as an alternative investment.

The metal surged 23% this year and climbed to a 26-year high of $732 an ounce on May 12 on investment demand. The dollar fell 8.1% against a basket of six currencies such as the euro and yen in 2006, the fourth decline in five years. „Conditions are in place for gold to move higher as we head into the new year,” said Philip Newman, a senior metals analyst at London-based metals research company GFMS Ltd. „We are still expecting the US dollar to weaken considerably and that is one factor that would push gold higher.” Gold futures for February delivery rose $1.10, or 0.2%, to $638 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price since December 5.
Prices gained 2.5% this week, the second straight weekly increase. Nymex will close its trading floor on January 1 for the New Year holiday and on January 2 to mourn the death of former US President Gerald R. Ford. Electronic trading will be open on January 1 at 6 p.m. New York time. In London, gold for immediate delivery was little changed at $635.10 an ounce at 5:43 p.m. local time, with this week's gain at 2.3%. Prices surged 25% in 2002 in both New York and London. Selling by mining companies may have limited any gains on Friday. Producers can take advantage of the rally by selling metal before it's mined to hedge against a possible drop in prices.

„We're seeing some year-end producer selling,” said Simon Weeks, head of precious-metals trading at ScotiaMocatta in London. „After the first week in the new year, prices will probably start to go lower.” There was no 3 p.m. afternoon fixing at the London Bullion Market Association on Friday because of the year-end holidays, Weeks said. „We've gone up from the mid $620s to the $630s on very little volume,” Weeks said. „As such, unless we hit the ground running in January, which I don't think will happen, we'll be heading back down to $600.” Reduced central bank selling will help propel the average gold price to $710 next year from $608.62 this year, said Paul Yusem, an investor in Lombard, Illinois, who has traded gold futures for six years. „Gold is drastically undervalued at current levels,” Yusem said. „The only reason gold is not over $900 an ounce today is due to central bank selling. Not only will gold outperform stocks and bonds in 2007, it will be the go-to investment for 2007.”

The central bank of Russia, the world's second-biggest oil producer, increased gold holdings by 2.2% to 394.1 metric tons in the third quarter, according to the London-based World Gold Council. China should increase holdings of gold in its foreign reserves, the overseas edition of the country's state-run newspaper People's Daily reported on December 1, citing Gao Jie, a professor at the University of International Business and Economics. The metal could be used during times of financial crises, Gao said. Gold makes up 1.3% of China's $1 trillion of reserves, lower than the 3% benchmark for other countries, Gao said. Silver fell 1 cent to $12.845 an ounce in London. Platinum rose $22.50 to $1,135 an ounce and palladium was $9 higher at $334.50. (Bloomberg)