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Gold hits record high as Fed statement hits dollar

NEW YORK (Reuters) - Gold jumped on Wednesday, hitting record highs for a fifth straight day and coming near $1,300 an ounce as the dollar tumbled the day after the Federal Reserve raised expectations that more monetary easing was on the way.

Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo September 17, 2010. Spot gold hit a new record high of $1,277.75 an ounce on Friday, as investors remained concerned about economic prospects. REUTERS/Yuriko Nakao

Silver also hit a 2-1/2 year peak at above $21 an ounce, near its highest in 30 years as investors poured into exchange traded funds in search of cheaper safe-haven assets.

The dollar fell broadly against major currencies after Tuesday’s Fed statement signaled its readiness to pump billions of dollars into the economy through purchases of government debt, a process known as quantitative easing.

The dollar slumped and bullion surged as investors sought a hedge against economic uncertainty.

“Possible quantitative easing continues to put a significant weakening into the dollar,” said Frank McGhee, head precious metals trader at Chicago-based Integrated Brokerage Services. “You’re seeing the euro and gold rally together for the first time in a long time. So, the inverse relationship between gold and dollar may be finally reasserting itself.”

McGhee said gold rallied on concern that the dollar could head into an extended period of weakness, which often boosts gold.

That inverse gold/dollar correlation has been shaky this year, but Reuters data showed it has strengthened to a negative 0.8 in the last five days from 0.3 for the past 25 days.

Spot gold hit a new record of $1,296.10 an ounce and was trading at $1,290.90 an ounce at 3:37 p.m. EDT (1937 GMT), showing a 0.4 percent gain on the day. U.S. gold futures ended up $17.80 an ounce at $1,292.10.

In addition to dollar weakness, gold has gotten a boost from concerns about the stability of the financial system and the outlook for fiat currencies in general.

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“This is not just about the dollar any more,” said Pau Morilla-Giner, senior portfolio manager and head of alternative investments, equities and commodities at London & Capital.

“This is about any currency that is used and generated in a country with massive dislocations, an excess of sovereign debt and a weak banking system. And now, for the first time in history, all major Western currencies have that problem.”

CONDITIONAL MONETARY EASING

The dollar hit a five-month trough against the euro and fell to its weakest level versus yen since Japan’s intervention.

Credit Agricole analyst Robin Bhar said he interpreted the Fed statement as “a conditional easing bias.”

“It pushes the door for QE2 (a second round of quantitative easing) wider,” he said, adding that this had implications “for a weaker dollar and further unease of what governments will do to weaken their currencies to support flagging economic growth.”

On charts, technical support was evident after spot gold cleared a trendline connecting the highs from December and June, and resistance from a rising channel dated back to late July coincided with the $1,300 mark.

Gold has risen by over 17 percent this year, as investors have sought a relatively safe asset in which to park their cash as major currencies, stocks and bonds have become increasingly volatile.

Among other precious metals, silver prices broke above $21.00 an ounce to their highest since March 2008 and remained within a hair’s breadth of highs not seen since October 1980.

Holdings in the iShares Silver Trust jumped 127.81 tonnes, the biggest gain in nearly 10 months, to 9,509.55 tonnes.

Spot silver hit a high of $21.16. It stood at $21.10, up 0.8 percent on the day, and set for a rise of 9 percent in September, its largest monthly gain since November 2009.

“Historically, the silver price has often acted as a geared play on gold prices, so when the gold price is rising, often the silver price outperforms,” said Nicholas Brooks, head of research at London’s ETF Securities.

“However, when the gold price falls, silver can fall sharply. Silver had also tended to be more sensitive to the business cycle due to its heavy use in industry.”

Spot palladium rose 3.6 percent to $545.50 an ounce, while platinum gained 0.7 percent at $1,631.50.

Additional reporting by Amanda Cooper and Jan Harvey in London; Editing by David Gregorio

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