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Gold Climbs to Record on Higher Oil Prices, Weakening Dollar

By Marianne Stigset

Jan. 8 (Bloomberg) -- Gold rose to a record as higher crude oil and a weaker dollar spurred demand for the metal as a hedge against inflation.

Gold is off to its best start to the year since 1980. Oil rose to a record $100 last week, U.S. warships were confronted by Iranian boats over the weekend, and the dollar today fell against 15 of 16 major currencies.

``The U.S. dollar is weakening and oil has picked back up,'' said David Thurtell, a metals analyst at BNP Paribas SA in London. ``There are a lot of supportive reasons to buy and not many reasons to sell.''

Gold for immediate delivery rose as much as $17.84, or 2.1 percent, to $876 an ounce in London, exceeding the previous record of $868.89 set Jan. 3. The metal traded at $874.90 as of 12 p.m. in London. Gold for February delivery rose as much as $16.80, or 2 percent, to $878.80 an ounce on the Comex division of the New York Mercantile Exchange.

The metal last reached an all-time high in New York in 1980, when the dollar was weakening, oil prices were rising and the U.S. and Iran were at loggerheads. U.S. Navy warships were approached by Iranian ``fast boats'' in the Straits of Hormuz on Jan. 6, the U.S. Defense Department said yesterday. The straits are the sea route for about a quarter of the world's oil.

``The geopolitical situation is having an impact,'' Mario Innecco, a futures broker at MF Global Ltd. in London, said by phone. ``The Americans made some pretty hawkish comments.''

Dollar Weakens

Spot prices advanced 31 percent last year, the biggest gain since 1979, when U.S. inflation was more than 13 percent. U.S. consumer prices increased 0.8 percent in November, the most in more than two years. Inflation in the 13-nation euro region accelerated to 3.1 percent in November, the fastest since 2001, according to Eurostat.

The dollar declined against all of the world's 16 biggest currencies in the past 12 months apart from the Korean won.

``We remain bullish longer-term due to lower interest-rate expectations, oil-related inflation and the current geo- political climate,'' James Moore, a precious metals analyst with, wrote today in an e-mail.

Investors are also buying gold as an alternative investment after the Standard & Poor's 500 Index had its worst start to a year since 2000.

Hedge-fund managers and other large speculators increased their net-long positions in New York gold futures in the week ended Jan. 1, according to U.S. Commodity Futures Trading Commission data.

Monetary System

Speculative long positions, or bets prices will rise, outnumbered short positions by 199,438 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report. Net- long positions rose by 15,063 contracts, or 8 percent, from a week earlier.

Gold is also being supported by investment funds allocating more cash to commodities, Thurtell said.

According to the New York Mercantile Exchange, gold first had a monetary connection in the U.S. in 1792 when Congress backed dollars by gold and silver. It became part of the world's monetary system in 1944 when the Bretton Woods agreement made the dollar convertible to a fixed gold price of $35 an ounce and other countries fixed their currencies to the dollar.

The gold price was fixed at $35 an ounce until 1968. U.S. President Richard Nixon closed the ``gold window'' in 1971, stopping the controlled trading of gold. By the end of 1979, gold was above $500 an ounce.

$800 Average

Gold will probably average $800 an ounce this year, compared with $696 last year, according to the median estimate of 37 traders, analysts and investors surveyed by Bloomberg News last month. Gold was the second-best performing metal after lead on the UBS Bloomberg Constant Maturity Commodity Index last year. The index of 26 commodities climbed 22 percent.

Ross Norman, director of London-based and a former trader of physical bullion, forecast in a Jan. 2 interview that gold may rise ``well above'' $1,000 an ounce this year, with a price of $1,200 ``not out of the question.''

Goldman Sachs International Group Inc. economist James Gutman, who is tied as the most-accurate analyst in the London Bullion Market Association's 2007 gold-price forecast, said in a Dec. 11 report that gold will drop to $790 in six months and $750 in 12 months.

``As the U.S. dollar gains strength once again, the price of gold will, in turn, likely decline,'' the report said. The bank recommended selling December 2008 gold futures.

``A lot of people have been expecting a correction and they're not getting it,'' Innecco said. ``We're seeing some short-covering'' today.

Mine Output

Stagnating production may buoy prices. Global output fell to a 10-year low of 2,477 tons in 2006, according to the London- based research company GFMS Ltd. Supply from South Africa declined 7.5 percent to the lowest since 1922 as companies were forced to dig deeper and pay workers more.

``Gold should continue to gain in value, aided by stagnating mine output, mounting demand from investors and central banks, and its close link to the dollar,'' Commerzbank AG in Frankfurt said in a report today.

Among other precious metals, silver for immediate delivery rose 35 cents, or 2.3 percent, to $15.50 an ounce. The metal advanced 15 percent last year, for a seventh consecutive annual advance.

Platinum for immediate delivery in London climbed $22.50, or 1.5 percent, to $1,545.50 an ounce. The metal reached a record $1,555.25 on Jan. 4. Palladium rose $4 to $374 an ounce.

Platinum jumped 34 percent last year, spurred by strikes and accidents at mines in top producer South Africa, which curbed production.

Following are technical gauges for gold:


20-day moving average              825.06  100-day moving average             768.38  200-day moving average             717.68  14-day relative strength index     70.3    Fibonacci        Start    End      50%       38.2%                   604      876      740       708  To contact the reporter on this story:  Marianne Stigset in London at   [email protected]