Gold surges to $1,340

Concerns over the dollar and yen send prices rallying to new highs.

By TheStreet Staff Oct 5, 2010 9:54AM

thestreetBy Alix Steel, TheStreet


Updated at 2:15 p.m. ET


Gold prices surged to new record highs Tuesday as investors rushed into the haven asset on global currency problems and a weaker dollar.


Gold for December delivery settled up $23.50, or 1.8%, to $1,340.30 an ounce at the Comex division of the New York Mercantile Exchange. Gold today traded as high as $1,342.60 and as low as $1,313.30.


The U.S. dollar index was slipping 0.9% to $77.77, while the euro was up 1.1% to $1.38 against the dollar. The spot gold price was adding more than $25, according to Kitco's gold index.


A slew of data and announcements highlighting the weakness of global currencies and the health of governments spurred the recent gold rally.

"The weaker dollar, combined with strong physical demand, had created a favorable environment for gold prices to set new highs," said Suki Cooper, a commodities research analyst at Barclays Capital.


The Bank of Japan slashed its interest rate to nearly zero and might create a fund of $60 billion to buy government securities and other assets in hopes of devaluing the yen after it rallied to a 15-year high earlier this year. Australia also kept its interest rate unchanged.


In Europe, Moody's announced it was putting Ireland's Aa2 debt rating under review for a downgrade. This comes a day after the country cut its growth estimates for 2010 and 2011 and as the government is bailing out its financial system.


In the U.S., Federal Reserve Chairman Ben Bernanke gave his clearest signal yet that the Fed is ready to expand its balance sheet and buy more government debt in order to jump-start the economy.


Bernanke appeared Monday evening in front of college students in Providence, R.I., where he said "additional (bond) purchases have the ability to ease financial conditions." He also defended the Fed's $1.7 trillion asset purchase program, which began in January 2009.


There is still some uncertainty as to how the Fed will issue another round of quantitative easing -- whether it will be another large-scale, short-term program or a smaller and longer round of purchases.


William Poole, a senior economic adviser at Merk Investments, cautions that "Chairman Bernanke has misled the market before. In a speech in early December 2008, he indicated that the Fed might engage in large-scale purchases of long-term government bonds. . . .  No such program was announced at the FOMC meeting later that month."


All this global news was a perfect cocktail for gold prices as they underscored the fragility of paper money. Anytime a government intervenes in its currency market, it points out how quickly paper currency can be devalued and highlights gold as a form of money that retains more worth.


The more U.S. dollars that are printed, the more dollars it takes to value an ounce of gold, which not only raises the metal's worth but also makes it a safer place to preserve one's wealth.


But with gold's pullbacks minimal and its rallies in double digits, it's hard to know how to buy the metal. The popular gold exchange-traded-fund SPDR Gold Shares (GLD) currently holds more than 1,300 tons as investors piled into the metal in September.


Phil Streible, a senior market strategist at Lind-Waldock, is a long-term bull but is recommending that investors stay cautious before buying, especially ahead of Friday's U.S. jobs number. "You have to be cautious as these levels. . . . If you're definitely looking at entering into positions, don't enter up at these levels. . . . Wait for around that $1,300 . . . and go lightly."


Silver prices soared 70 cents, or 3.2%, to settle at $22.74 per ounce, while copper closed up 6 cents at $3.73 per pound.


Gold mining stocks, a risky but sometimes more profitable way to buy gold, were rallying Tuesday. Barrick Gold (ABX) was up 3.4% to $47.55 while Newmont Mining (NEM) was gaining 2.9% to $64.55. Randgold Resources (GOLD) was adding 2.6% at $105.43, and AngloGold Ashanti (AU) was up 2.5% to $47.29.


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