James Turk rebuts Tim Wood on gold''s failure to keep up with commodity prices

Section:

Gold May Rise, Spurred by
Speculation Inflation Will Accelerate

By Choy Leng Yeong
Bloomberg News Service
Monday, March 28, 2005

http://www.bloomberg.com/apps/news?
pid=email_us&refer=commodity_futures&sid=a_BQoE.Me208

SEATTLE -- Gold may rebound from a six-week low on speculation that
inflation will accelerate and boost the allure of the precious metal
as a hedge.

Twenty-two of 43 traders, investors and analysts surveyed by
Bloomberg on March 23 and March 24 advised buying gold, which fell
3.4 percent last week to $424.80 an ounce. Fourteen recommended
selling the metal and seven were neutral.

"Gold will rebound as people start to focus more on inflation and
less on the recent interest-rate hike," said Thomas Au, a principal
at brokerage R.W. Wentworth & Co. in New York. Au said he has as
much as $1 million in personal investments, including 10 percent in
gold stocks.

Gold futures for April delivery fell $14.90 last week on the Comex
division of the New York Mercantile Exchange, surprising the
majority of analysts in the weekly Bloomberg survey. In a poll
conducted March 17 and March 18, a majority predicted an increase in
gold. The survey has forecast the direction of gold in 28 of 48
weeks, or 58 percent of the time.

Bullion traders focused on the threat of inflation in part because
U.S. consumer prices in February rose 0.4 percent, the most in four
months, the government said March 23. A day earlier, the Federal
Reserve raised benchmark interest rates for a seventh time since
June to curb inflation.

Last week's drop in gold, the biggest in 11 weeks, was spurred by a
rally in the dollar. Gold sold in dollars fell 4.9 percent the past
two weeks as the U.S. currency rose 3.9 percent against the euro.
Some currency traders expect the Fed to quicken the pace of rate
increases, boosting the dollar's value. Gold buyers say the Fed
won't act fast enough and that the dollar will resume a slide that
last year sent bullion to a 16-year high of $458.70.

"Gold will definitely benefit" if the Fed fails to keep inflation in
check, said Stephen Leeb, president of New York-based Leeb Capital
Management Inc., which oversees more than $110 million with about
2.5 percent in gold equities.

The Fed on March 22 raised its target rate for overnight loans
between banks by a quarter-point to 2.75 percent and said "pressures
on inflation have picked up."

Oil has risen 46 percent from a year ago to $54.84 a barrel in New
York, and the Reuters-CRB Index of 17 commodities, including coffee,
copper, and sugar, on March 16 reached 323.33, the highest since
December 1980.

Some investors buy gold in times of inflation, which erodes the
value of fixed-income assets, such as bonds. Gold futures surged to
$873 in 1980, when U.S. consumer prices rose 12.5 percent from the
previous year.

A futures contract is an obligation to buy or sell a commodity at a
set price by a specific date.

One reason gold buyers expect a rally is concern that high energy
costs will hurt the economy. The pump price of gasoline as of March
21 was up 19 percent this year to $2.109 a gallon on average, the
most ever, and crude oil reached a record $57.60 on March 17.

"If energy is driving inflation higher, the Fed really cannot step
in front of that," said Leeb, who expects gold to rise to $470 by
the end of this year. "The Fed doesn't have much control over energy
prices."

Consumer prices rose 3.3 percent in 2004, the most in four years.
Excluding food and energy, prices in February were 2.4 percent
higher than a year earlier, the biggest increase since August 2002.
Economists expect consumer prices in 2005 to rise between 3.9
percent and 1.8 percent, according to a Bloomberg poll of 63
economists polled from March 1 to March 8.

"Oil continues to move higher," said James Turk, founder of Channel
Islands-based Goldmoney.com, which stores about $40 million of gold
for owners in 102 countries. "So it's inevitable that gold is going
higher and has a lot of catching up to do."

General Motors Corp., the world's biggest automaker, on March 16
forecast its largest quarterly loss since 1992 partly as near-record
fuel prices erode sales of sport-utility vehicles.

The Fed increased rates five times last year and twice this year
from a 46-year low of 1 percent, surpassing the European Central
Bank's benchmark rate of 2 percent.

"I don't think the Fed can afford to risk" an economic slowdown by
raising rates too aggressively, Leeb said. "You are sitting on an
economy with a tremendous amount of debts."

Mortgage applications fell for the fifth time in the last six weeks,
as higher interest rates caused the biggest drop in refinancing
since May, the Mortgage Bankers Association said last week. Sales of
previously owned homes fell to a 6.79 million annual rate in
February from a revised 6.82 million in January, the National
Association of Realtors said last week.

Rising interest rates increase the cost of borrowing for debtors.
U.S. household debts, excluding mortgages, reached a record $2.1
trillion, and the government's budget deficit swelled to a record
$412.6 billion in the year ended Sept. 30, as the war in Iraq and
security costs contributed to the third straight annual shortfall.

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----------------------------------------------------

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