Are you sure?

Gold may extend rally as oil gain revives inflation concern

Gold may gain for a fourth straight week as rising oil prices renewed the appeal of the precious metal as a hedge against inflation.

Twenty-two of the 42 traders, investors and analysts surveyed by Bloomberg News from Sydney to Chicago on January 25 and January 26 advised buying gold, which rose 2.3% last week to $650.70 an ounce in New York. Twelve respondents said to sell, and eight were neutral.
Gold touched a five-month high last week as oil jumped 6.6%, its biggest advance in two months. Demand for StreetTracks Gold Trust, an exchange-traded fund that is linked to the price of gold, has risen 45% in the past year. The fund has 146 million shares outstanding, each representing a 10th of an ounce of gold. „The upward pressure on gold prices seems likely to stay in place,” said Chris Yoo, manager at Samsung Futures Inc.'s global commodities team in Seoul.
„Investment demand for gold is continuing to rise on gold ETFs and demand for oil is also rising as prices are viewed as low,” said Yoo, who expects gold to rise as high as $660 this week. Gold rose $14.60 on the Comex division of the New York Mercantile Exchange last week, touching $661.20, the highest since August 10. The gain was expected by the majority of analysts surveyed on January 18 and January 19. Respondents have forecast prices accurately in 87 of 144 weeks, or 60% of the time.

Some investors buy gold to preserve purchasing power in times of accelerating inflation. Gold futures surged to $873 in 1980, when a jump in the cost of oil led to a 13% annual rise in US consumer prices. „Gold demand will stay firm due to buying interest by investors for an inflation hedge,” said Kazuhiko Saito, chief analyst of Interes Capital Management in Tokyo. Newmont Mining Corp., the world's second-biggest gold producer, raised its estimate of production costs three times last year, partly because of high-priced energy.
The company July said it would spend $290 to $310 to mine an ounce of gold in 2006, up from an April estimate of $280 to $295 and a February forecast of $283. In 2005, the average was $236. „We will see cost increases” this year, CEO Wayne Murdy said January 26 at the World Economic Forum in Davos, Switzerland. „We have seen our energy costs go up dramatically over the last several years.”

Oil prices that touched a 19-month low of $49.90 a barrel on January 18 have since risen 11% to $55.42. Oil may rise this week on speculation that US fuel stockpiles will drop as colder weather in the eastern half of the country spurs demand, a separate Bloomberg survey showed. The rally in oil, which reached a record $78.40 on July 14 and has soared from $19.84 at the end of 2001, has helped fuel a six-year rally in gold.
Gold may also rise on speculation that a decline in the dollar will spur demand for an alternative investment, analysts said. „Gold should still maintain its strong momentum because of the US dollar,” said Satoshi Matsunaga, a metals analyst at Mitsui Bussan Futures Ltd. in Tokyo. The dollar has fallen 3.8% in the past year against a basket of the world's six major currencies partly as the current-account deficit widened to a record $225.6 billion in the Q3 as the trade gap grew.
„We continue to be very optimistic about the price of gold,” Murdy said. „The underlying fundamentals that are driving the price are all still there, so we think this rally's got a way to go over the next several years. The dollar will continue to decline because of the imbalance in the balance of payments.”

Hedge-fund managers and other large speculators increased their net-long position in Comex gold futures by 34% in the week ended January 23, the most since August 2005, the Washington-based Commodity Futures Trading Commission said January 26. Speculative long positions, or bets that prices will rise, outnumbered short positions by 21,551 contracts to 84,501, the most since the week ended November 14, the commission said. Two weeks earlier, the net long holdings were the lowest since July 2005. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date. (Bloomberg)