Gold price at six-year pinnacle

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Economics Editor

The price of gold soared to a six- year high yesterday, jumping by $7 an ounce to $416.25 at the morning fix in London. Heavy speculation by hedge funds has driven the price up by almost 30 dollars so far this year.

The 7 per cent rise in just one month has come after two years in which the gold price barely moved. But there are widely divergent explanations about what has caused the rally.

Andy Smith, precious metals analyst at UBS, said that the sudden increase in the gold price bore all the hallmarks of a speculative surge. "Gold looked a good thing to punt after two years in which it had done nothing," he said.

However, Kit Juckes, currency strategist at NatWest Markets, said that the rising gold price reflected concern about the attempt by hard currency countries to revive their economies by depreciating their exchange rates.

A further instance of that strategy came at the World Economic Forum in Davos. Hans Tietmeyer, President of the Bundesbank said on Friday that he believed the dollar could rise against the Mark.

However, Mr Juckes pointed out that despite the recovery in the dollar, investors knew that its long-term track record was one of decline. "The rise in the dollar is largely by default and it has left people looking for something that's hard.''

The idea that investors are fleeing traditional hard currency for gold as a haven of value gets backing from the breakdown in the relationship between the dollar and the gold price. Usually the two are inversely related; in other words, a rise in the price of gold goes hand in hand with a fall in the value of the dollar. Since the end of last year, however, both have been rising.

This view from the currency markets finds little favour by those who follow the commodity markets. According to Mr Smith, the price surge has come from "only semi-serious money - big as far as the gold market is concerned but a drop in the ocean compared with the weight of investible funds."

Mr Smith argued that the price rise was likely to prove short-lived.

The price of gold fell back on profit taking in the afternoon fix to $414.50