Inflation seen as inevitable, search for inflation hedge seen helping gold - apr - 11, 2005
Dear Crowne Gold Clients;
By Choy Leng Yeong
Bloomberg News Service
Monday, April 11, 2005
Gold may rise for a third week on speculation accelerating inflation
will boost the allure of the precious metal as a hedge.
Twenty-two of 43 traders, investors, and analysts surveyed April 7
and April 8 advised buying gold futures for April delivery, which
rose 50 cents last week to $428.80 an ounce on the Comex division of
the New York Mercantile Exchange. Eleven recommended selling the
metal, and 10 were neutral.
"High inflation is inevitable, and that will eventually benefit
gold," said Stephen Leeb, president of New York-based Leeb Capital
Management Inc., which oversees $110 million, including 5 percent in
gold equities. Higher prices for airline tickets "or what you're
paying at the gas pump: That's just flat-out inflation, and we're
seeking hedges," he said.
The price for an average gallon of gasoline will rise to a record
$2.28 a gallon this summer, the government said April 7. Rising fuel
costs led AMR Corp.'s American Airlines and other U.S. carriers to
boost round-trip U.S. leisure fares this month. Qantas Airways Ltd.,
Australia's biggest airline, more than doubled surcharges for
The gain in gold futures last week was expected by the majority of
analysts in a survey March 31 and April 1. Prices gained $3.50 the
previous week. Gold reached a 16-year high of $458.70 on Dec. 2 in
part because U.S. consumer prices rose 3.3 percent in 2004, the most
in four years.
A futures contract is an obligation to buy or sell a commodity at a
set price by a specific date. The Bloomberg survey has forecast the
direction of gold correctly in 30 of 50 weeks, or 60 percent of the
Some investors buy gold in times of inflation, which erodes the
value of fixed-income assets, such as bonds. Gold futures surged to
$873 an ounce in 1980, when U.S. consumer prices rose 12.5 percent
from the previous year.
U.S. consumer prices in February rose 0.4 percent, the most in four
months, the government said on March 23. Excluding food and energy,
prices in February were 2.4 percent higher than a year earlier, the
biggest increase since August 2002. A day earlier, the Federal
Reserve raised its benchmark interest rate for a seventh time since
June to curb inflation.
The Fed 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.''
"I don't think the Fed has the kind of latitude they would like to
have to raise interest rates aggressively," Leeb said. Gold prices
may double in the next three years, he said.
Crude oil, which reached a record $58.28 a barrel on April 4, is 44
percent higher than a year earlier. The Reuters-CRB Index of 17
commodities, including coffee, copper and sugar, on March 16 reached
323.33, the highest since December 1980.
Higher oil prices also contributed to a wider U.S. trade deficit. A
widening gap raises concerns that more dollars will have to be
converted to other currencies to pay for imports.
The deficit probably widened in February to $59 billion, the second-
largest on record, based on the median estimate of 46 economists
surveyed by Bloomberg News. This compares with a $58.3 billion
deficit in January. The Commerce Department is scheduled to release
the report on April 12.
"Considering the large increase in oil prices, the increases in
consumer purchases and credit," the deficit might exceed $60
billion, said Paul Yusem, a Lombard, Illinois-based investor who has
traded gold futures for five years. "With a large or a larger-than-
expected deficit, the dollar should be down for the week,"
benefiting gold, he said.
Gold may also rise on speculation the U.S. will veto any attempt to
sell gold owned by the International Monetary Fund, the third-
largest bullion owner after the U.S. and Germany.
The IMF owns 2.1 percent of the world's bullion, worth about $44
billion at current market prices. The fund has kept the value of its
gold at less than $41 an ounce since 1971. A revaluation would
enable the IMF to forgive debts or suspend loan repayments to combat
poverty in Africa.
The Group of Seven richest countries will meet April 15 to review a
report by the IMF on the possibility of selling some of its gold.
The U.S. is the largest shareholder of the IMF with a 17 percent
voting stake, enough to block an 85 percent majority required to
approve a gold sale.
The IMF "will not sell gold," said William O'Neill, a partner at
Logic Advisors LLC, a commodity consulting company in Upper Saddle
River, New Jersey. "The U.S. remains against such sales and is not
likely to alter that posture."
Gold rose on April 6 after U.S. Rep. James Saxton said Congress will
block any attempt to sell the IMF's 3,217 metric tons of gold.
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