Bloomberg.com

Gold Soars Most Since 1999, Silver Surges on Demand for Haven

By Pham-Duy Nguyen

Sept. 17 (Bloomberg) -- Gold surged the most in nine years as investors sought the safety of precious metals on concern that the credit crisis will deepen, leading more financial institutions to fail. Silver soared the most since 1979.

Equities tumbled after the Federal Reserve took over the biggest U.S. insurer. The cost of borrowing dollars for three months jumped the most since 1999 as banks hoarded cash. Central banks in the Phillipines and Venezuela said they may buy gold. In March, the metal reached a record as the government steered JPMorgan Chase & Co. to buy Bear Stearns Cos.

"People are worried about money being safe in a bank,'' said Ron Goodis, the futures trading director at Equidex Brokerage Inc. in Closter, New Jersey. ``With paper assets in question, gold represents the textbook storehouse of value.''

Gold futures for December delivery gained $70, or 9 percent, to $850.50 an ounce on the Comex division of the New York Mercantile Exchange. The percentage gain was the biggest for a most-active contract since Sept. 28, 1999. The metal reached a record $1,033.90 on March 17.

Silver futures for December delivery rose $1.158, or 11 percent, to $11.675 an ounce, the biggest gain since Dec. 31, 1979.

Gold is up 1.5 percent this year, while silver still is down 22 percent.

The dollar fell as much as 1.3 percent against a weighted basket of the euro, yen and four other major currencies.

Financial `Catastrophe'

"When you're perhaps facing a catastrophe in the U.S. financial market, investors are thinking: `Screw it. I'm jumping back into the old faithful,''' said Joel Crane, a metals strategist at Deutsche Bank AG in New York. "Gold's relative value is cheap compared with the dollar.''

About $2.8 trillion of market value was erased from global stocks this week as Lehman Brothers Holdings Inc. filed for bankruptcy, Bank of America Corp. purchased Merrill Lynch & Co. for $50 billion, and the U.S. government took control of American International Group Inc. in an $85 billion takeover to prevent the biggest financial collapse ever.

Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.

"You're sorting out, by process of elimination, that gold is the asset you'd rather own,'' said Greg Orrell, who manages the OCM Mutual Fund at Orrell Capital Management Inc. in Livermore, California. "It's the currency you'd prefer.''

Rates Plunge

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954. Investors pushed the rate as low as 0.0304 percent.

"It's not even worth it to keep money in the bank,'' said John Licata, the chief investment strategist at Blue Phoenix Inc. in New York. ``Gold is going to be the beneficiary of a global move toward a safe haven.''

Reserve Primary Fund, the oldest U.S. money-market fund, yesterday became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman.

"That's systemically scary,'' said Frank McGhee, the head dealer of Integrated Brokerage Services LLC in Chicago. "Unless you put gold in your backyard, you have to trust your money to an institution.''

Gold's gains accelerated after prices topped $800, analysts said.

"There are going to be more banks that will fail,'' said Matt Zeman, a metals trader at LaSalle Futures Group Inc. in Chicago. "This is the time when people want to buy gold.''

London-based researcher GFMS Ltd. said gold may rise to $950 by the end of the year as central banks and mining companies hold back sales and investors buy the metal as a haven against falling equities.

Mortgage Meltdown

Since the second quarter of 2007, banks worldwide have posted $517.7 billion in losses and writedowns related to investments in subprime mortgages. The Fed has also engineered $200 billion in takeovers for Fannie Mae and Freddie Mac, the biggest providers of financing for U.S. homes.

The world's central banks, already the biggest holders of gold, may look to the metal as an alternative reserve asset to the dollar, said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia. Until today, Gartman had been bearish in his outlook for gold.

Venezuela said today it may buy 15 metric tons of gold a year to develop investment products, including coins. At a conference in London, Maria Ramona Gertrudes Santiago, the managing director of the treasury at the Phillipines Central Bank, called gold a ``perfect hedge.''

Sales of gold by European central banks may total 365 metric tons in the year through Sept. 26, below the cap of 500 tons, the World Gold Council said yesterday. That would mark the lowest amount since the banks agreed to sell the metal in 1999.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

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