Gold eyes all-time high on currency crisis fears


By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, November 7, 2007

Gold has surged to $846 an ounce on fears of a dollar collapse and signs of spreading credit crisis in the United States, coming within a whisker of the all-time high seen at the end of the 1970s inflation era.

Warnings by a top Chinese official that Beijing intends to switch part of its $1,430 billion reserves from dollars to "stronger currencies" appears to have lit the fuse under an explosive mix of record oil prices, rising global inflation, and mounting concerns that the world financial system is coming unglued.

"We're seeing a loss of confidence in all paper currencies, but above all in the dollar," said Hans Redeker, currency chief at BNP Paribas.

The apparent failure of the US Treasury's $75 billion rescue plan for sub-prime mortgage securities and the risk of mass downgrades on US bond insurers have caused a rush for safe-haven investments, topped by precious metals and top sovereign bonds.

Gold last touched $850 an ounce at the London PM Fix in a wild spike on January 21, 1980, just after the Soviet invasion of Afghanistan and the seizure of US hostages in Iran. Inflation was then running in double digits in most western economies.

In today's terms, this would be equivalent to $2,000 an ounce, suggesting that the current six-year bull market in precious metals may have much further to run.

Hedge funds are already betting that the US Federal Reserve will be forced to slash rates over coming months to head off recession, launching a "reflation rally" that will flood the world with liquidity once again.

John Reade, a strategist at UBS, said gold now seemed to be caught in a frenzy of speculative momentum.

"Gold, oil, and the dollar are all feeding off each other. Gold truly has the bit between its teeth having gained $50 an ounce in a week. The pressure this is placing on the options market will likely see it reach $850 within a couple of days," he said.

Mr Reade said gold has tended to fall sharply whenever speculative long positions on New York's COMEX futures markets reach extreme levels, but it could be different this time.

"Everybody is waiting to see whether 'exotic options' set above $850 will trigger a fresh wave of buying," he said.

UBS warned that any number of factors could halt the rally, citing a move by OPEC to increase oil output, "verbal" intervention by officials to slow the dollar's slide, and major selling by central banks. None of these appear imminent.

Ross Norman, a former gold trader and now head, said the markets had slowly come to realize that the world faces a "peak gold" outlook as discoveries become ever rarer.

"There is a chronic under-supply of gold because it is so hard to dig the stuff out the ground. The world's biggest producer -- South Africa -- is down to 264 tonnes a year, the lowest since 1932," he said

"Compare that with inflows into the new exchange traded funds. ETF Securities alone has 730 tonnes ($1.97 billion), and most that has been bought this year. A massive new channel has been opened up for pension funds to buy gold, and we believe that Russian and Chinese central banks have buying as well," he said.

"But there is an even deeper issue at work as people start to question the fundamental structure of the world economy. The mercury is running very high right now," he said.

Gold has now more than tripled since Gordon Brown ordered the Bank of England to start selling half of Britain's bullion reserves. The first auction in 1999 was at $254 an ounce, the absolute bottom of a 21-year bear market.

The total losses for the British taxpayer caused by these sales now amount to £3.3bn, even after adjusting for returns on alternative dollar, yen and euro bonds.

Mr Norman said the last $50 rise in the gold price has been fuelled by "hot money" that could prove fickle, but any correction will likely be short.

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