Gold Climbs to Two-Month High as Dollar Slumps; Silver Advances

Dec. 15 (Bloomberg) -- Gold prices rose to the highest in two months as the slumping dollar boosted the appeal of the precious metal as an alternative investment. Silver jumped almost 4 percent.

The dollar fell 1.6 percent today against a weighted basket of six major currencies. Last week, the greenback tumbled 4 percent, the most since September 1985, while gold jumped 9.1 percent. The metal reached a record in March as interest-rate cuts by the Federal Reserve sent the dollar to an all-time low against the euro.

“One of the things gold has going for it is that it’s viewed as an international currency,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “We’re expecting the Fed to take the rate down from 1 percent to 0.5 percent. Gold is reacting to the downturn in the dollar.”

Gold futures for February delivery rose $16, or 2 percent, to $836.50 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price reached $843.70, the highest for a most-active contract since Oct. 16. Last week’s gain was the biggest since mid-September. The metal has dropped 0.2 percent this year.

Silver futures for March delivery climbed 39 cents, or 3.8 percent, to $10.62 an ounce. The metal is still down 29 percent this year.

Policy makers tomorrow will cut the target rate for overnight loans between banks to 0.5 percent, the lowest since 1958, according to the median estimate of 84 economists in a Bloomberg survey. The benchmark rate was 5.25 percent in September 2007, when the Fed began to cut borrowing costs as the economy headed into a recession.

Before last week’s decline, the U.S. currency surged from July to November on demand for a haven as credit markets froze and equities plunged. Yields on one-month and three-month U.S. Treasury notes fell below zero last week.

Alternative Haven

Gold may benefit as investors seek an alternative haven to the dollar, analysts said. Since the collapse of Lehman Brothers Holdings Inc. in September, gold traded as high as $936.30 on Oct. 10. The metal reached a record $1,033.90 on March 17.

“Gold is finally reacting to the financial crisis and money creation,” said Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland.

The U.S. has pledged $8.5 trillion through 23 different programs to ease the financial crisis and stimulate the economy.

“Inflationary pressures are likely to emerge in response to the colossal injections of public liquidity,” analysts at Citigroup Inc. said in a report. “Generally, commodity prices do well in a low interest rate inflationary environment.”

Some investors buy gold when consumer costs accelerate. The metal rallied 31 percent last year, when the inflation rate rose the most in almost two decades.

Still, the metal’s gains may be limited as sell-offs in equity markets force investors to shed gold to cover losses. Gold touched $681 on Oct. 24 as the Standard & Poor’s 500 Index plunged 17 percent in October.

“When investors need access to liquidity, it’s easy to get out of gold,” Lesh of FuturePath said.