Gold Prices Celebrate Uncertainty, Rising Oil Costs

By Barbara Hagenbaugh

Gold prices briefly topped $600 an ounce for the first time in 25 years Thursday as investors continued to flock to the metal to diversify their portfolios and to get in on a craze hitting other commodities.

The price of an ounce of gold trading in New York ended the day at $595.20, up $7.30 from Wednesday, after hitting $600 an ounce earlier in the day in markets around the globe.

Gold prices have risen 15% in 2006 and are up nearly 40% in the last year.

Frank Holmes, CEO of U.S. Global Investors, predicts prices will hit $700 an ounce within the next few years. "We are going to see higher highs," he says.

For consumers, the gain in gold prices will likely mean small increases in jewelry prices. But retailers will likely have to eat much of the increase to keep customers, Global Insight senior economist John Mothersole says. "There is a lot of competition in jewelry," he says.

Behind gold’s gain:

*Oil. Holmes notes there has historically been a strong correlation between oil and gold prices. Companies and countries are paid for their oil in dollars. When prices for oil rise, producers seek to diversify some of their earnings out of dollars. Gold is one way to diversify.

*Dollar uncertainty. There are some expectations that the value of the dollar will decline later this year, Action Economics chief economist Michael Englund says. So investors are likely pulling money out of dollars and into gold.

"Gold is a flight-to-quality product," Englund says, noting political instability in a number of countries is also driving some investors to the safety of gold.

*Metal mania. Prices for a variety of metals, such as aluminum, zinc and copper, have been rising rapidly in response to booming demand for metals used in construction. Gold is getting caught up in the hoopla.

"If anything, gold has been rather late to the party," Mothersole says.

*Inflation jitters. Economies around the world are showing signs of strength, leading to concerns that inflation may be lurking around the corner. Investors who are concerned about inflation like to put money into gold, an item with intrinsic value that is therefore viewed as an inflation hedge.

Gold mutual funds, which invest mainly in shares of gold-mining firms, were the top-performing mutual fund category in the first quarter, climbing an average 20.5%. The funds have gained an average 380% the past five years.

"The sharp escalation in gold prices … clearly makes gold one of the wisest investment choices of recent times," Matt Parry, an economist for Moody’s Economy.com in London, wrote Thursday in a note to clients.

Contributing: John Waggoner

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