Mining World

Nearby gold futures extended their record high above $1,000 an ounce Wednesday and the most-active contract pushed toward its own all-time peak, supported by continued U.S. dollar weakness and technical momentum.

Inflation-hedge buying on lingering enthusiasm following Tuesday’s comments by Federal Reserve Chairman Ben Bernanke that the recession is likely over also boosted gold. Participants were selling the U.S. dollar and buying the metal in anticipation of higher consumer and producer prices down the road.

Most-active December gold rose $13.90 on the Comex division of the New York Mercantile Exchange to settle at $1,020.20 an ounce, its fourth consecutive close in four-digit territory. Meanwhile, thinly traded nearby September futures hit an intraday high of $1,019.80, surpassing the all-time front-month high of $1,014.60, set in March 2008. The most-active futures record of $1,033.90 was also set that month.

Positive price sentiment is building as front-month futures continue their longest-ever streak of days above $1,000, with Wednesday marking the first day nearby prices didn’t spend any time below that level.

With the Fed likely to leave interest rates alone for the time being and participants seeing more of an economic recovery, they are buying gold in anticipation of rising inflation, said Michael Gross, broker and futures analyst with OptionSellers.com.

"People are buying gold to get out of the dollar," said Andrew Montano, director of precious metals at Scotia Mocatta.

The U.S. dollar slipped against its major rivals Wednesday after a fresh show of strength in U.S. manufacturing buoyed stocks and encouraged sellers of low-yielding assets. Shortly after gold closed, the ICE Futures U.S. dollar index was down 0.272 point.

"We’re seeing a lot of problems with the dollar," a trader said.

Gold is often bought and sold inversely with the dollar since the metal is considered a dollar hedge and, more broadly, an alternative currency. Some participants also believe the metal will hold its value more strongly than other assets in times of rising producer and consumer prices.

However, the rally is coming amid stagnating gold exchange-traded fund buying and poor jewelry demand from India, the world’s largest buyer of the metal for jewelry. Mine supply is also on the rise.

"It is taking place amid really poor fundamentals," Kitco Metals analyst Jon Nadler said. "That’s why I’m ready to call it a bubble."

Rather, Nadler said speculative funds - which primarily trade futures for profit rather than obtaining physical product - are behind the rally as the dollar weakens and participants anticipate rising inflation, despite current data.

Wednesday data showed the U.S. consumer-price index rose 0.4% in August. Core CPI, which excludes food and energy prices, increased 0.1%, as expected. Despite the monthly increase in the overall index, consumer prices were down 1.5% compared to one year ago.

On Tuesday, data showed the U.S. producer price index for finished goods rose 1.7% on a seasonally adjusted basis in August, after falling 0.9% in July. Last month’s increase was bigger than the 1% gain predicted by economists. However, PPI was still down 4.3% from August 2008.

Meanwhile, the gap between yields on 10-year inflation-linked Treasury securities and nominal bonds, known as the breakeven rate, stood at 1.86 percentage points, a sign that investors expect the inflation rate to average 1.86% over the period - in line with the Fed’s preferred core inflation rate of around 2%. Five-year breakevens stood at 1.37 points Wednesday, implying an even lower inflation rate.

That contrasts with consumers’ inflation expectations, however: Friday’s University of Michigan sentiment survey showed five-year inflation expectations at 2.8%.

"Inflation-anticipatory dollar-selling has been the pivot point around which the current rallies have orbited," Kitco Metals analyst Jon Nadler said.

The metal is continuing its technical breakout after breaching resistance around the $990 level, the trader said.

Most-active December gold futures on the Comex division of the New York Mercantile Exchange last week breached $1,000 for the first time in six months. Previously, the contract topped $1,000 and subsequently fell back in March and July 2008 and again in February.

"You’re seeing some follow-through buying now that gold is holding $1,000," said Carlos Sanchez, associate director of research with CPM Group.

Silver futures gained with gold prices. Participants were also purchasing the gray metal - which is more widely used in industrial applications than is gold - because of anticipated continued economic recovery.

"People are speculating that demand is going to pick up," Gross said.

Comex December silver rose 43 cents to settle at $17.43 an ounce.

Continued weakness in the U.S. dollar also supported platinum and palladium futures. Nymex October platinum rose $29.80 to $1,350.10 an ounce, while December palladium on the exchange gained $4.25 to $300.50 an ounce.

Higher gold prices also supported the platinum group. "It’s on the back of gold trying to make a push toward its all-time high," a trader said.

 
Settlements (ranges include open-outcry and electronic trading):
London PM Gold Fix: $1,015.75; previous PM $996.00
Spot gold at 1:34 p.m. EDT: $1,018.35, up $12.45; Range: $1,006.57-$1,020.55
Dec gold $1,020.20, up $13.90; Range $1,007.90-$1,023.30
Dec silver $17.430, up 43 cents; Range $17.035-$17.580
Oct platinum $1,350.10, up $29.80; Range $1,324.60-$1,351.60
Dec palladium $300.50, up $4.25; Range $294.50-$304.80
 

@ Dow Jones Newswires