Gold at $600 as funds feed on weak dollar
April 7, 2006
By Ethel Hazelhurst
Johannesburg - Gold traded at $600 an ounce in New York yesterday for the first time since 1981.
"Commodity funds took advantage of the one-way bet offered by a weakening dollar," said Investec analyst Leon Esterhuizen.
News agency Bloomberg reported that this week the US currency had its first quarterly decline in a year against the euro "on speculation that the interest rate increases by the European Central Bank will begin to outpace moves by the US Federal Reserve".
Because gold is quoted in dollars, the prices of the euro and the metal always move in opposite directions. On Wednesday, expectations of rising interest rates in Europe pushed the euro to a seven-month high against the dollar.
"Commodity funds now believe that the dollar can only weaken further so they have nothing to lose by getting heavily into gold," Esterhuizen said.
Explaining the rationale behind the commodity funds' tactics, he said: "They like to invest where they can have a big impact on the price, so that eventually they can get out of the market at a profit.
"And, with the dollar weakening, there is no downside and therefore no rush to run for the door. Gold fits their requirements exactly, with supply almost matching demand, so they know they can push the price materially higher. These funds have everything going their way."
The London-based World Gold council reported in a March 29 newsletter that funds had been the biggest buyers of gold this year, "outpacing purchases by jewellers, who accounted for 73 percent of demand last year".
Esterhuizen said: "Political instability and rising oil prices added impetus to the gold price rise."
Bloomberg reported that crude rose for a second day in New York on "declining [petrol] stockpiles before the peak US summer driving season added to concern about reduced exports from Nigeria and Iran".
The price of Brent crude rose to $67.79 (R409) a barrel yesterday. And a Bloomberg poll of 30 analysts put their estimate of the average oil price this year at a record $63 a barrel.
Gold was not the only beneficiary of the pressure on oil prices. Silver touched a 22-year peak of $12.08 an ounce and copper hit a record high a day after it surged 3 percent "on relentless fund buying, heading a step closer towards uncharted territory of above $6 000 a ton", Reuters said.
And platinum rose to $1 086 an ounce. The agency quoted economist Stephen Briggs, at SG Corporate and Investment Banking, as saying: "The amount of money that's still flowing into commodities, and metals in particular, just shows no let-up."
Buoyant commodity prices and a strong euro briefly sent the rand below R6 a dollar yesterday. But Absa treasury economist Chris Hart said he expected there would be strong resistance at this level.
And comments from the European Central Bank later moderated enthusiasm for the euro, sending it into its biggest decline in two weeks, unwinding some of the day's moves.
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