Gold shines as it surges to record

ROMA LUCIW

Globe and Mail Update

January 8, 2008 at 12:32 PM EST

Bullion sprinted to a record high just below the key $900 (U.S.) an ounce level Tuesday, with investors jumping aboard the yellow metal's furious rally as one report labelled gold the new global currency.

Gold futures for February delivery rose to $880.40 an ounce on the Comex division of the New York Mercantile Exchange, surpassing a previous high of $875 set in 1980.

Spot prices for the precious metal hit $876.40 an ounce in early Tuesday trading, topping last week's historic high of $869.05 in London. (When adjusted for inflation, gold remains well below its all-time high. An ounce of gold at $875 in 1980 would be worth $2,115 to $2,200 today.)

John Ing, president of Maison Placements Canada Inc., expects bullion prices will hit a medium-term peak of $1,000 in 2008. “One catalyst will continue to be the decline of the U.S. dollar,” he said. “But the resumption of inflation will be what eventually sends gold to its new highs. That is something the market has not seen in more than 20 years.”

Gold Future Feb'08

Gold's front-month futures contract rose to $879.40 an ounce on Tuesday, surpassing a previous high of $875 set in 1980.

S&P/TSX Global Gold

Gold companies on the TSX global gold sub-index surged 4.6 per cent on Tuesday.

Kinross Gold

Kinross Gold lead gold stocks higher, gaining as much as 12.2 per cent on Tuesday morning.

Barrick Gold Corp.

Barrick Gold shares climbed 4.7 per cent in early trading.

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Central banks, which have been lowering interest rates as they struggle with a global credit crunch, are “laying the basis for a whopping bout of inflation,” Mr. Ing said.

Gold is off to its best start to the year since 1980, according to Bloomberg data. The most recent surge in bullion comes as crude oil prices touched a record $100 last week, the U.S. dollar struggles against the other major global currencies, and ongoing geopolitical tensions between the United States and Iran, among others.

Buying of bullion was also boosted by Wednesday's scheduled launch of the Shanghai gold futures contract, traders and gold analysts said. A growing wealthy middle class across China and India has increased demand for gold at a time when companies are struggling to increase output.

“Markets betting on big demand for gold coming out of Chinese investors having seen what they are capable of in the stock market,” said Stewart Hall, strategist at HSBC Securities (Canada).

Lending more support, an editorial comment published Tuesday in the Financial Times described gold's recent popularity as a return to its traditional status as a safe haven and urged investors to think of bullion not as a commodity, but as another currency.

Gold has been strong not only in U.S. dollar terms, but also when counted in euros, in Canadian, Australian, and New Zealand dollars, and in the Chinese renminbi, said Dennis Gartman, an influential U.S. trader who writes the The Gartman Letter.

“This, we believe, is proof that gold has become the world's third major reservable currency,” he said. “That has been, and likely shall continue to be, the major thesis driving our long standing bullishness of gold.”

Analysts said ETFs, already major gold owners, are boosting their bullion holdings early in 2008. “Some of the momentum hedge investors are also looking at their portfolios, which have been badly mauled by the credit problems, and they are adding assets with momentum,” Mr. Ing said.

Canadian gold producers are riding the rally higher as well. Gold companies on the TSX global gold sub-index surged 4.6 per cent on Tuesday, with Kinross Gold jumping 12.2 per cent and Barrick Gold Corp. rising 4.7 per cent.

Goldcorp Inc. stock rallied 2.6 per cent after it said its gold production increased 35 per cent in 2007 to 2.29 million ounces — the high end of its forecast. “Goldcorp ended the year with its highest quarterly gold production ever,” CEO Kevin McArthur said. The company also forecast that production would rise by 14 per cent this year.

The higher gold prices bode well for Canada's gold producers, which as a sector underperformed last year's 31 per cent price surge because of modest growth in production and a lack of profitability, Mr. Ing said.

“Under a different pricing metric, with gold at $850 an ounce, some of these gold miners will be exceedingly profitable and their reserves will be upgraded,” he said. “The story of 2008 will be very much that of gold stocks outperforming bullion.”