Gold Tops $1,000 an Ounce as Dollar Struggles

Gold has topped $1,000 an ounce, trading at a historic high of $1,000.25 yesterday morning on weak retail sales numbers, a lukewarm reaction to Treasury Secretary Paulson's plan to improve the housing market, and news that two large funds may go bust.

"This is a sign that the problems are serious, that people are losing faith in the dollar," a former Republican presidential candidate, Rep. Ron Paul of Texas, said. "This could lead to economic chaos."

The price of gold, which has been rising steadily for eight years, has shot up nearly 40% over the last six months as the dollar's plunging value against other currencies has accelerated. The dollar hit a record low against the euro yesterday and was close the weakest level in 12 years against the yen. It slid to almost a one-for-one exchange rate with the Swiss franc. Driving up the price of gold yesterday were retail sales figures, which showed a fall of 0.6% in February, the second drop in three months, bringing total revenue to its lowest level since last August. Exacerbating the market's negative sentiment was Mr. Paulson's speech yesterday to the National Press Club in Washington, where he called for a number of reforms to the credit markets. He also mentioned his support for a "strong dollar," although he did not elaborate.

More bad news hit the market yesterday when Carlyle Capital Corp. said it had been unable to strike a deal with lenders and was nearing collapse. Another firm, Drake Management, started by former BlackRock money managers, said it also might have to shut down its largest hedge fund.

"Today's spike will likely become known as the 'Carlyle/Drake Rally,'" a senior analyst at metals retailer Kitco, Jon Nadler, said of the spike in gold prices.

Investors, particularly hedge funds and speculative funds, are driving up the price of gold as they flee the uncertainties of the securities market for the relative safety of the metal. This is just a temporary bump, however, Mr. Nadler said.

Once the major hedge funds and other players understand the full extent of the subprime debacle and the write-downs that the banks are facing, he said, "the temptation to push the envelope and drive up commodities prices will come to a swift end." Mr. Nadler said he expects gold prices to fall back to $650 to $750 an ounce by the second half of the year, as the impact of the credit crunch becomes better known.

Some economists are faulting the Federal Reserve for the spike in gold and the fall in the value of the dollar, adding that the Fed's announcement earlier this week that it will flood the market with $200 billion in liquidity will just worsen matters.

"I think flooding the credit markets with liquidity is not the answer to the current problem," an economist at the National Bureau of Economic Research, Anna Schwartz, said. "The only action the Fed has taken is to provide liquidity and not deal with the real problem. Something must be done to clean up companies' balance sheets."

Ms. Schwartz said she would like to see the Fed send examiners to all of the financial institutions who could look into their balance sheets and determine the real market value of these banks' assets. "If actions were taken in a timely way to work on the underlying problem, the credit market mess wouldn't have been as prolonged and we wouldn't have dealt with all of the auxiliary problems we have seen." she said.