Bloomberg

Gold Jumps as Government Spending Boosts Inflation-Hedge Demand

January 26th, 2009

By Pham-Duy Nguyen

Gold rose to the highest closing price in almost five months in New York on speculation that government spending will spur inflation, boosting demand for the precious metal as a hedge. Silver also gained.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, rose 4.7 percent last week to a record 832.6 metric tons. In 2008, the metal advanced for the eighth straight year as U.S. equity and commodity indexes lost more than 30 percent.

“Massive injections of liquidity into the global banking system will serve to drive gold prices higher,” said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia.

Gold futures for April delivery climbed $13, or 1.4 percent, to close at $910.70 an ounce on the Comex division of the New York Mercantile Exchange’s Comex division, the highest for a most-active contract since Aug. 1. The price reached $918.20, the highest intraday price since Oct. 10.

Silver futures for March delivery gained 17 cents, or 1.4 percent, to $12.11 an ounce. The metal slumped 24 percent in 2008, while gold gained 5.5 percent.

U.S. President Barack Obama today urged swift congressional action on an $825 billion recovery package. Lawmakers already have spent $350 billion of a $700 billion financial-rescue fund to shore up lenders.

Banks worldwide have posted more than $1 trillion in credit losses and writedowns related to the credit crisis. The Federal Reserve has slashed its benchmark interest rate to almost zero percent to spur growth as the yearlong U.S. recession deepened.

Gold may average $975 in the second quarter, possibly topping $1,000, on demand for a store of value, Deutsche Bank AG said in a report on Jan. 23.

“The eventual stimulus plan will weaken the dollar to support gold,” Deutsche Bank said.

The dollar fell as much as 1.4 percent against a weighted basket of six major currencies.

Bloomberg
http://www.bloomberg.com

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