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Gold eyes record as dollar and inflation stars align

LONDON (Reuters) - Gold could be pushing towards a record high after prices surged through $1,000 an ounce on Tuesday for only the third time in history as the dollar’s broad-based deterioration continues to fuel buying of the metal.

A shop keeper shows gold jewellery to a customer inside his shop in Dhaka September 8, 2009. REUTERS/Andrew Biraj

With the precious metal benefiting from fears over rising inflation in the longer term as well as momentum buying and dollar weakness in the short term, prices are only a short hop from the March 2008 record of $1,030.80 an ounce.

“We had a good technical break higher last week and now the weaker dollar is helping gold progress higher,” said Saxo Bank senior manager Ole Hansen.

“We are finally taking out some levels we haven’t seen for a while, especially in the currencies,” he said. “On that basis, I would assume we will go up to test the highs from last year.”


Gold last week broke out of the tight range it had held over the seasonally slack summer months, as a break through key technical levels at $962 and $976 led shorts to cover and undecided investors to jump into the market.

After a few sessions’ consolidation above $985 an ounce, the metal hit new year-highs of $1,007.45 an ounce on Tuesday, leading to speculation currency weakness could spark a move above the current record high.

“The implications for the breakout are strong both in the short and medium to long term, and are indicating that we could go to $1,050,” said independent technical analyst Cliff Green.

Barclays Capital analyst Phil Roberts was more bullish still, forecasting a possible move up to $1,100 an ounce in the months to come. “The technical picture looks very constructive for further gains,” he said.


Gold is taking strong support from a slide in the dollar. The metal tends to track moves in the U.S. unit inversely, as it can be bought as an alternative asset to the currency and is cheaper for non-U.S. investors if the dollar dips.

The dollar index .DXY, which tracks the unit's performance against six major currencies, slid to near year-lows on Tuesday on talk of reserve diversification away from the U.S. currency in the fallout of the global economic crisis.

The euro meanwhile broke above a big reported options barrier at $1.4450, further fuelling gains in gold.

Michael Lewis, head of commodities research at Deutsche Bank, said a sustained move higher in the gold price will be reliant on dollar weakness.

“You have an environment of very low interest rates in the U.S., and the current account in fiscal deficit,” he said.

“That mix of loose monetary policy and quite expansionary fiscal policy is quite a deadly cocktail for currencies, and quite good for gold, which likes a weak-dollar, low-real interest rate environment.”


Expectations inflation will rise when the economy stabilises are also supporting gold, a popular hedge against rising prices. Quantitative easing measures introduced by governments across the world earlier this year have pumped vast amounts of money into global financial systems, boosting inflation talk.

While we are currently still in a deflationary environment, fund managers say they are keen to be ahead of the curve when inflation kicks in.

“Zero interest rates,.... quantitative easing -- which is putting a lot of liquidity in the system -- and all the budget deficit spending are clearly beginning to gain traction,” said Ashok Shah, chief investment officer at London and Capital

“All of the measures taken to help the economy stabilise are great for risk markets, but at the same time they mean that the expectations for inflation are going to come in.”

“Gold is celebrating because the day when inflation might return is getting sooner rather than later,” he said.

Additional reporting by Veronica Brown; Editing by Keiron Henderson