NEWS

Gold May Rise, Spurred by Speculation Inflation Will Accelerate
 

March 28 (Bloomberg) -- Gold may rebound from a six-week low on speculation that inflation will accelerate and boost the allure of the precious metal as a hedge.

Twenty-two of 43 traders, investors and analysts surveyed by Bloomberg on March 23 and March 24 advised buying gold, which fell 3.4 percent last week to $424.80 an ounce. Fourteen recommended selling the metal and seven were neutral.

``Gold will rebound as people start to focus more on inflation and less on the recent interest-rate hike,'' said Thomas Au, a principal at brokerage R.W. Wentworth & Co. in New York. Au said he has as much as $1 million in personal investments, including 10 percent in gold stocks.

Gold futures for April delivery fell $14.90 last week on the Comex division of the New York Mercantile Exchange, surprising the majority of analysts in the weekly Bloomberg survey. In a poll conducted March 17 and March 18, a majority predicted an increase in gold. The survey has forecast the direction of gold in 28 of 48 weeks, or 58 percent of the time.

Bullion traders focused on the threat of inflation in part because U.S. consumer prices in February rose 0.4 percent, the most in four months, the government said March 23. A day earlier, the Federal Reserve raised benchmark interest rates for a seventh time since June to curb inflation.

Last week's drop in gold, the biggest in 11 weeks, was spurred by a rally in the dollar. Gold sold in dollars fell 4.9 percent the past two weeks as the U.S. currency rose 3.9 percent against the euro. Some currency traders expect the Fed to quicken the pace of rate increases, boosting the dollar's value. Gold buyers say the Fed won't act fast enough and that the dollar will resume a slide that last year sent bullion to a 16-year high of $458.70.

Gold, Fed

``Gold will definitely benefit'' if the Fed fails to keep inflation in check, said Stephen Leeb, president of New York- based Leeb Capital Management Inc., which oversees more than $110 million with about 2.5 percent in gold equities.

The Fed on March 22 raised its target rate for overnight loans between banks by a quarter-point to 2.75 percent and said ``pressures on inflation have picked up.''

Oil has risen 46 percent from a year ago to $54.84 a barrel in New York, and the Reuters-CRB Index of 17 commodities, including coffee, copper and sugar, on March 16 reached 323.33, the highest since December 1980.

Some investors buy gold in times of inflation, which erodes the value of fixed-income assets, such as bonds. Gold futures surged to $873 in 1980, when U.S. consumer prices rose 12.5 percent from the previous year.

A futures contract is an obligation to buy or sell a commodity at a set price by a specific date.

Energy Costs

One reason gold buyers expect a rally is concern that high energy costs will hurt the economy. The pump price of gasoline as of March 21 was up 19 percent this year to $2.109 a gallon on average, the most ever, and crude oil reached a record $57.60 on March 17.

``If energy is driving inflation higher, the Fed really cannot step in front of that,'' said Leeb, who expects gold to rise to $470 by the end of this year. ``The Fed doesn't have much control over energy prices.''

Consumer prices rose 3.3 percent in 2004, the most in four years. Excluding food and energy, prices in February were 2.4 percent higher than a year earlier, the biggest increase since August 2002. Economists expect consumer prices in 2005 to rise between 3.9 percent and 1.8 percent, according to a Bloomberg poll of 63 economists polled from March 1 to March 8.

``Oil continues to move higher,'' said James Turk, founder of Channel Islands-based Goldmoney.com, which stores about $40 million of gold for owners in 102 countries. ``So it's inevitable that gold is going higher and has a lot of catching up to do.''

Auto Sales

General Motors Corp., the world's biggest automaker, on March 16 forecast its largest quarterly loss since 1992 partly as near-record fuel prices erode sales of sport-utility vehicles.

The Fed increased rates five times last year and twice this year from a 46-year low of 1 percent, surpassing the European Central Bank's benchmark rate of 2 percent.

``I don't think the Fed can afford to risk'' an economic slowdown by raising rates too aggressively, Leeb said. ``You are sitting on an economy with a tremendous amount of debts.''

Mortgage applications fell for the fifth time in the last six weeks, as higher interest rates caused the biggest drop in refinancing since May, the Mortgage Bankers Association said last week. Sales of previously owned homes fell to a 6.79 million annual rate in February from a revised 6.82 million in January, the National Association of Realtors said last week.

Rising interest rates increase the cost of borrowing for debtors. U.S. household debts, excluding mortgages, reached a record $2.1 trillion, and the government's budget deficit swelled to a record $412.6 billion in the year ended Sept. 30, as the war in Iraq and security costs contributed to the third straight annual shortfall.

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