Gold May Rise as Investors Seek Alternative to Dollar

Gold may climb for the second-straight week as investors avoid dollar-denominated assets and purchase the precious metal.

Thirteen of 34 traders, investors and analysts surveyed by Bloomberg from Sydney to Chicago on Dec. 21 and Dec. 22 advised buying gold, which rose 0.5 percent last week in New York to $622.30 an ounce, the first gain in three weeks. Nine respondents said to sell the metal, and 12 were neutral.

Investment in the StreetTracks Gold Trust, a $9 billion exchange-traded fund linked to the price of the metal, has more than doubled in value this year and the number of shares outstanding jumped 78 percent. Gold is up 20 percent and heading for its sixth straight annual gain, while the dollar has fallen 8 percent against a basket of six major currencies.

“There is too much capital chasing not enough goods,” said Friedrich Kernstock, a director at Vienna-based Kernco Metal Trading GmbH, a metals trading and investment company, who expects gold to average $700 in 2007. “More instruments have been developed for the small investor to take part in the bull-run for commodities. Gold should go up.”

Gold rose $3.20 an ounce last week on the Comex division of the New York Mercantile Exchange, in line with a majority of analysts who predicted a gain when surveyed Dec. 14 and Dec. 15. Bloomberg’s survey has accurately forecast the direction of prices in 84 of 139 weeks, or 60 percent.

Gold futures for February delivery rose $6, or 1 percent, to $628.30 an ounce at 8:30 a.m. New York time on Comex.

Rising Investment

StreetTracks, which began trading on the New York Stock Exchange in November 2004, attracted $4.7 billion this year. Investors poured $3 billion into the fund in 2005. Similar funds are listed on exchanges in Singapore, the U.K., France, Australia and South Africa.

Gold has outperformed stocks, bonds and the U.S. dollar this year. The Standard & Poor’s 500 Index gained 13 percent while the benchmark 10-year U.S. Treasury returned 2.3 percent for investors.

“I see the gold market resuming its uptrend in the first quarter,” said William O’Neill, a partner at commodity-research firm Logic Advisors in Upper Saddle River, New Jersey. “I forecast a weaker dollar which will help gold.”

Investors are counting on a decline in the dollar to boost gold prices. The U.S. economy grew at the slowest pace this year in the third quarter, the Commerce Department said on Dec. 21. The biggest decline in homebuilding in 15 years may stymie growth, forcing Federal Reserve officials to cut interest rates next year and hurting the outlook for the U.S. currency.

Rates Unchanged

The Fed has kept rates unchanged at 5.25 percent since June, after two consecutive years of increases. The European Central Bank raised rates to 3.5 percent on Dec. 7, the sixth increase in a year. The euro is up 11 percent against the dollar this year.

“The gold market is not weak in fundamentals,” said Mikikaru Amano, a commodity analyst at Taiheiyo Bussan Co. in Tokyo. “Investors expect gold prices will go higher early next month on expectations of new money coming from pension funds.”

Gold, sold in dollars, generally moves in the opposite direction to the U.S. currency. The metal has gained every year since 2001, moving in tandem with the euro from 2002 to 2004. Gold gained 18 percent last year even as the dollar gained 14 percent against the euro.

Inflation Concern

Investors may also buy gold on speculation inflation will accelerate. Prices paid to U.S. producers in November jumped by the most since 1974, the Labor Department said on Dec. 19. The producer-price index climbed 2 percent in November from a month earlier, led by higher energy costs.

“The latest PPI report shows that there is a lot of inflationary pressure in the pipeline, but the bigger issue is the decline in the demand for the dollar outside the U.S.,” said James Turk, founder of GoldMoney.com, which had $180 million worth of gold and silver in storage for investors at the end of November.

Gold reached a record $873 an ounce in January 1980 after Iran cut oil supplies, doubling the cost of oil and sparking a surge in the inflation rate.

Iran, the world’s fourth-largest oil producer, said on Dec. 18 it will calculate its fuel and other overseas revenue in euros rather than dollars. The UN Security Council voted unanimously on Dec. 23 to impose sanctions on the Islamic Republic over its refusal to suspend uranium enrichment.

“We already know that central banks are diversifying out of the dollar and now Iran has announced it is dumping the dollar in favor of the euro,” Turk said. GoldMoney.com is based in Jersey, Channel Islands.

December Decline

Still, a gain in the equities market this month has discouraged some investors from buying gold until next year, some analysts said. The S&P Index is up 0.7 percent in December while gold futures fell 4.2 percent, the first decline in three months. The S&P is up 13 percent for the year, which would be the biggest annual gain since 2003.

“Equities are the fly in the ointment for gold and commodities right now,” said Michael Guido, director of hedge- fund marketing at Societe Generale SA in New York. “If equity markets keep trending up, that’s going to be a reallocation threat to gold.”

The 38 percent of respondents who said to buy gold this week was the lowest for a Bloomberg survey since Aug. 25.

Hedge-fund managers and other large speculators decreased their net-long position in Comex gold futures by 15 percent in the week ended Dec. 19, according to U.S. Commodity Futures Trading Commission data.

Speculator Holdings

Speculative long positions, or bets prices will rise, outnumbered short positions by 69,893 contracts, down 11,936 contracts from the previous week, the Washington-based commission said Dec. 22.

Some analysts are skeptical gold can gain for a seventh straight year, a feat unmatched in the metal’s trading history.

There will be “new interest initially,” said Christoph Eibl, co-founder of Tiberius Asset Management AG in Zug, Switzerland, who predicts gold will average $580 in 2007. “Then commodities will burst.”