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Gold Price Tops $700 an Ounce As Tensions Rise

Posted on: Wednesday, 10 May 2006, 06:00 CDT

By John Waggoner

Gold soared above $700 an ounce Tuesday for the first time since 1980, propelled by rising international tensions and a falling dollar.

Futures contracts for June delivery closed at $701.50, while spot gold closed at $699.40, up $21.60, after trading as high as $700.30. Pushing gold up were these factors:

*International tensions. Investors often buy gold during periods of global tension, and worries about Iran's nuclear ambitions might be prompting some investors to buy gold as a haven.

*Economic imbalances. Many foreign central banks are keeping vast amounts of dollars in their reserves. China, for example, has $853 billion in its foreign currency reserves. The U.S. trade deficit equals about 7% of gross domestic product, a historically high level.

"It's at levels that have caused concern for other countries," says Caesar Bryan, manager of Gamco Gold fund.

The worry is that foreign

central banks will start to sell some of their dollars and buy other currencies or gold instead. Such selling would knock down the value of the dollar and push up the price of gold.

Speculation that the Federal Reserve is nearly done raising interest rates is also pushing the dollar lower and gold up. The Fed meets today and is expected to raise short-term rates a quarter-point.

Global investors flock to the highest interest rates. If U.S. rates fall behind others, investors could shift to higher-yielding investments denominated in other currencies.

*Supply and demand. As gold prices soar, more investors, such as hedge funds, want to buy it. And not just hedge funds. The iShares Comex Gold Trust, an exchange-traded fund that invests in gold bullion, now has 1.3 million ounces of gold, up 611,000 ounces from 712,000 at the end of 2005.

It's unlikely that gold production will soar anytime soon. The supply of gold is limited, and it can take five to 10 years to open a new gold mine, says Joe Wickwire, manager of Evergreen Precious Metals fund.

Investors also bid up prices of other metals Tuesday:

*Platinum leaped to $1,243 an ounce, a record high.

*May copper futures jumped to a record high of $3.70 a pound.

"It's like a big pack of wolves going from one commodity to the next," Gamco's Bryan says.

Gold punched through the $600-an-ounce level on April 6. Its record high was $850 an ounce in 1980. Gold futures prices have soared 64% in the past 12 months and 35% so far this year.

Bryan thinks the gains could be overdone, at least in the short term. But other managers think the rally in gold isn't over. "It's a space that has been undervalued and underinvested in for a long time," says Evergreen's Wickwire.

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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