Gold Could Rise for Fifth Straight Week on Dollar Slide

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The New York Sun

Gold may rally for a fifth straight week, the longest stretch since the metal climbed to a 26-year high in May, on speculation a slowing American economy will erode the value of the dollar.

Twenty-seven of 35 traders, investors, and analysts surveyed by Bloomberg from Sydney to Chicago on November 2 and November 3 advised buying gold, which rose 4.7% last week to $692.20 an ounce in New York. The percentage of respondents who expect prices to rise was the highest in more than a year. Four people said to sell the metal, and four were neutral.

Gold has climbed 9.1% in the past four weeks, rebounding from a two-month slide. The American economy grew at an annual rate of 1.6% in the third quarter, the slowest in more than three years, primarily because of the biggest drop in home construction in 15 years. The dollar is down 6% against a basket of six major currencies this year.

A weaker dollar is one of the “positive factors leading to a change in sentiment in the gold market,” the manager of the $100 million OCM Gold Fund in Livermore, California, Greg Orrell, said. “Economic data is increasingly showing the American economy is slowing down, leading to anticipation of a more accommodating monetary policy.”

Gold futures for December delivery rose $28.20 an ounce last week on the Comex division of the New York Mercantile Exchange. A majority of analysts surveyed on October 26 and October 27 anticipated the gain. Bloomberg’s survey has forecast the direction of prices accurately in 80 of 132 weeks, or 61% of the time.

The Federal Reserve hasn’t raised interest rates since June 29 amid the housing slump. The median price of a new home fell 9.7% to $217,100 in September from $240,400 a year earlier, a Commerce Department report showed on October 26. It was the biggest decrease since an 11.2% year-over-year drop in December 1970. The median price was the lowest since September 2004.

Gold and the dollar generally move in opposite directions. Gold has gained every year since 2001, more that doubling in the past five years. The dollar index rose last year after three consecutive annual declines as the Fed boosted rates to damp inflation.

“The weaker dollar has been a major factor,” a partner at commodity research firm Logic Advisors LLC in Upper Saddle River, New Jersey, William B. O’Neill, said.

Gold prices may no longer mirror movements in oil, analysts said. The metal reached a record $873 an ounce in January 1980 after oil costs doubled in a year, sparking a surge in the inflation rate. The two commodities have moved in tandem this year before changing last month, analysts said.

“Gold shifted its attention away from the oil price and back to the dollar,” a trader at Heraeus Metallhandels GmbH in Hanau, Germany, which owns five precious-metal refineries globally, Alexander Zumpfe, said.

It now costs about 10 barrels of oil to buy an ounce of gold, compared with the long-term average of 17.5 barrels, Mr. Zumpfe said.

“If the ratio would move toward this average, this would mean that gold is expected to show a relatively better performance than the oil price,” Mr. Zumpfe said.

Since mid-May, gold has fallen 14% from $732 an ounce, the highest since February 1980, mostly because oil dropped 25% from a record $78.40 a barrel in mid-July. Gold is still up 21% this year, while oil has declined 3.1%.

The gold rally is reviving the speculative demand that helped spur gains in the first half of the year, some traders said. Prices dropped 1.9% in the third quarter, the first decline in six quarters and the biggest since the second quarter of 2004.

“The funds are creeping back in,” Mr. O’Neill of Logic Advisors said. “I rate gold a buy.”

Hedge-fund managers and other large speculators increased net-long positions in Comex gold futures in the week ended October 31, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 64,716 contracts, the Washington-based commission said November 3. Net-long positions rose by 8,666 contracts, or 15%, from a week earlier. The number had dropped in the previous seven weeks.

As of October 30, five gold exchangetraded funds, including the Lyxor Gold Bullion Securities on the London Stock Exchange, had record assets of 15.8 million ounces, worth about $9.46 billion, up from 15.6 million ounces a month earlier, the producer-funded World Gold Council said.

Some analysts expect the dollar to rebound, eroding gold’s appeal.

“Rallies such as this, which depend so much on the dollar, tend to correct quite quickly and sharply,” an analyst at Virtual Metals Consulting Co. in London, Matthew Turner, said.


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