Gold Climbs on Demand for Inflation Hedge as Energy Costs Rise

Aug. 26 (Bloomberg) -- Gold rose as a gain in energy costs revived demand for the precious metal as a hedge against inflation. Silver also climbed.

Crude-oil prices rallied as much as 2.4 percent to $117.89 a barrel on concern that Hurricane Gustav may enter the Gulf of Mexico and disrupt U.S. petroleum production. Gold reached a record in March as oil headed to an all-time high in July.

``Oil is the key to the turnaround in gold,'' said Marty McNeill, a trader at R.F. Lafferty Inc. in New York. ``Inflation is there. It's just a matter of people focusing on it.''

Gold futures for December delivery rose $2.40, or 0.3 percent, to $828.10 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price touched $812 as the euro fell as much as 1.2 percent against the dollar.

Silver futures for December delivery rose 19.9 cents, or 1.5 percent, to $13.678 an ounce. The metal has fallen 8.3 percent this year, while gold dropped 1.2 percent.

Some investors buy gold when energy costs climb to preserve purchasing power. Consumer prices rose at a 5.6 percent annual pace in July, the fastest in 17 years. Prices paid to U.S. producers soared 9.8 percent last month, the biggest increase since 1981. Oil reached a record $147.27 on July 11.

Still, gold's gains were limited after the dollar rose to a six-month high against the euro. A report showed German business confidence dropped more than forecast in August, pushing the euro as low as $1.4571. The currency reached a record $1.6038 on July 15.

"Physical" Demand

"Over the past three trading days, the dollar has regained pretty much all the ground that it lost over the preceding week,'' said John Reade, a metals strategist at UBS AG in London. "But gold has held above $800 despite this strength, supported by extremely strong demand for physical gold.''

Gold rallied 5.2 percent last week following an 18 percent decline in the previous five weeks. Jewelers, the world's biggest users of the metal, accounted for 68 percent of purchases last year, according to the producer-funded World Gold Council.

"Gold is positioned for a sharp move higher, although for this to happen, the dollar and probably crude will have to cooperate,'' Reade said. Earlier in August, UBS said gold will trade around $850 within a month and $900 in the next three months.

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