Gold powers above $1,500 as inflation worries mount

Reuters News
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Posted: Apr 20, 2011 4:20 PM
Gold powers above $1,500 as inflation worries mount

By Frank Tang

NEW YORK (Reuters) - Gold rallied above $1,500 an ounce for the first time on Wednesday, extending this week's run of record highs as investors sought to hedge growing inflation risks and bought into a broad commodities rally.

Mounting evidence of quickening inflation in major Asian economies such as China and India were echoed in Latin America on Wednesday, with Brazilian prices nearing a government ceiling and Mexico's yearly rate exceeding a key target. The break-even rates on U.S. Treasury Inflation-Protected Securities (TIPS) rose for a second day.

A second day of deep losses for the dollar and rallies in oil and grain markets that fueled further inflation concerns also buoyed bullion, which once again rose in tandem with riskier assets like equities as investors shifted their focus from gold's role as a safe-haven play to its potential as a store of value.

"People are buying any kind of risk assets almost without discretion across the commodity complex, and gold and silver are part of them," said Mark Luschini, chief investment strategist of broker-dealer Janney Montgomery Scott, which manages $53 billion in client assets.

Spot gold rose to an all-time high of $1,505.70 an ounce. It was up 0.3 percent at $1,498.54 by 1:53 p.m. EDT, having risen almost 4 percent over the past eight days. The metal is set for its 11th successive quarterly gain.

Silver also surged above $45 for the first time since 1980.

Gold has notched new records for four consecutive days, aided in large part by Monday's threat of a downgrade to the United States' triple-A credit rating and lingering euro zone debt worries that have depressed the dollar.

"This is just a continuation of a longer-term move being driven by worldwide monetary policies and specifically here in the United States," said Michael Cuggino, portfolio manager of Permanent Portfolio Funds with $12.5 billion in mutual fund assets.

"Is the U.S. debt ceiling going to be raised? If the debt ceiling is not raised, what happens to the U.S. debt when it matures?" Cuggino asked.

INFLATION PRESSURE CREEPING UP

Signs of simmering inflation across the world underpin gold. The break-even rates on the expected new five-year U.S. TIPS, which measures investors' inflation expectations, rose for a second day to 2.36 percent, roughly 1 basis point higher than late Tuesday.

In Brazil, annual inflation sped dangerously near a government ceiling in the month to mid-April, while Mexico yearly inflation rate climbed above policymakers' target rate of 3.0 percent as investors prepare for higher borrowing costs early next year.

Gold buying in the Asian countries is being fueled by rising consumer incomes and higher inflation. Both China and India reported higher than expected inflation last week.

While gold investors in Western markets have been motivated chiefly by risk aversion in recent years, the precious metal is a much more deeply established asset in Asia, being bought in the form of bullion bars and coins. India and China are by far the world's biggest bullion consumers.

DOLLAR, CREDIT RATING IN FOCUS

With the U.S. currency in particular seen as a key driver of gold prices, uncertainty over how the United States will adjust monetary policy -- after its second round of quantitative easing comes to an end in June -- is set to keep the metal underpinned.

Standard & Poor's said on Monday it might cut its long-term rating on the United States within two years, unless Washington can rein in its budget deficit.

Such a move by the S&P will heavily pressure the dollar, adversely affecting the currency market and economic stability throughout the world - a perfect recipe for gold rally.

"Gold has been acting as a currency in its own right, and that is why we are up at $1,500," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

Gold has long been seen as the ultimate haven from risk. During the financial crisis that rattled markets in 2009 and 2010 it was heavily bought on that basis, but its rally has since taken on a momentum of its own.

While gold prices are well below their inflation adjusted highs of more than $2,200 struck in 1980 -- when bullion prices spiked in response to the Soviet invasion of Afghanistan -- they have risen six-fold from just $250 an ounce in 2001.

(Additional reporting by Richard Leong in New York, Nick Trevethan, Lewa Pardomuan and Rujun Shen in Singapore and Chikako Mogi in Tokyo; editing by James Jukwey and Lisa Shumaker)