Gold hits new record high as demand for the dollar continues to weaken

Price hits $1117 as analysts expect further spikes
  • @AlistairDawber

Gold hit another record high yesterday with investors continuing to buy the precious metal as a hedge against further falls in the US dollar. The new high watermark of $1,117.05 a troy ounce comes after the US dollar slipped for a third consecutive day, registering a 15-month low.

The record comes after months of strong trading with investors seeking a safe haven from fragile equity markets and a historically weak US dollar, caused by low interest rates. Racing ahead over the past month, the closing spot price had risen from $999 on 1 October to hit a previous high of $1,064 on 13 October. Since then, prices had fallen to between $1,055 and $1,060.

In the last year, bullion has jumped more than 23 per cent, with the rally expected to go on into next year given the outlook for continued weakness in the dollar, especially with the US government looking to keep interest rates low in a bid to stimulate the economy. Since Lehman Brothers' collapse last September, gold has risen nearly 50 per cent.

Carsten Fritsch, an analyst at Commerzbank, said the falling US dollar was "providing tailwind", adding: "A further gold price increase has to be expected, especially as short-term-oriented market participants are likely to be jumping on the bandwagon."

Natalie Dempster, the head of investment at the World Gold Council in New York, said that while she was reluctant to predict a gold-price high, demand was still rising. "A number of factors are driving the price rises at the moment," she said.

"Investors are of course using gold as a hedge against the weakening dollar and against concerns that central banks will not remove quantitative easing measures in time, which would lead to inflationary pressures.

"But prices have also been helped by central banks becoming net buyers in the second quarter. China, Russia, and especially India, have reversed a trend where central banks have been sellers of gold for years," Ms Dempster said.

Indeed, as well as the weak US dollar, most analysts attribute the most recent spikes to huge orders from central banks. Last week, India bought 200 tons of gold from the International Monetary Fund, pointing to "the first natural deficit in the gold market for 30 years," according to Leon Esterhuizen, a gold-mining analyst at RBC."It changes the dynamic completely."

Bullion prices have strengthened in the last few months, despite improvements in equity markets. But though several asset classes returned to a semblance of health after suffering in the worst days of the financial crisis, most analysts expect to see gold surging ahead in the coming months.

"Despite the movements in the price over the last year, gold allocations are still very low," said Ms Dempster. "Gold only makes up about 1 per cent of total global assets. There is still ample capacity."

Mr Esterhuizen at RBC is more cautious about longer-term prices, but does expect to see the present rally continuing: "You have the perfect storm at the moment and so there is no reason to think anything should change. Our long-term price prediction is $1,000, but in the next six months or so, we would expect to see $1,200 gold."

The gains have led to a raft of impressive corporate updates. On Monday, Randgold Resources, the FTSE 100's only pure-gold miner, said that while its third-quarter profits were down because of higher-than-expected maintenance costs, it was pressing ahead with several new projects in Africa, partly encouraged by strong bullion prices.

A number of companies have started television advertising campaigns, designed to get consumers to sell unwanted gold jewellery, which can then be resold on the wholesale markets.

Other groups, such as an outfit called OuncesPounds are organising gold parties. The group claims that gold teeth can fetch as much as £500 each.