Gold Rises, Caps Eighth Straight Annual Gain, on Haven Demand

Dec. 31 (Bloomberg) -- Gold prices rose, capping an eighth straight annual gain, on demand for a store of value as the recession deepens and tensions mount in the Middle East.

This year, gold climbed 5.5 percent, the smallest increase since 2004. Recessions in the U.S., Europe and Japan sent the Reuters/Jefferies CRB Index of 19 raw materials to the biggest drop ever and erased more than $30 trillion in value from global equity markets. Silver fell 24 percent in 2008, while platinum dropped 38 percent and palladium plunged 50 percent.

“In a world where material weakness is the obvious sign of the times, to be up even by this barest of margins is really quite impressive,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter.

Gold futures for February delivery rose $14.30, or 1.6 percent, to $884.30 an ounce today on the Comex division of the New York Mercantile Exchange. Earlier, the price dropped as much as 1.5 percent.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, has climbed 24 percent this year to a record 780.2 metric tons on Dec. 29.

“Gold’s got the best shot of moving higher in 2009 out of any commodity,” said Matt Zeman, metals trader at LaSalle Futures Group in Chicago. “Its price is more driven by alternative-investment demand.”

Inflation Concerns

Gold may also benefit as U.S. policies to stop asset prices from falling send the dollar lower and result in inflation in the long term, said Chip Hanlon, the president of Delta Global Advisors Inc. in Huntington Beach, California.

The government has pledged more than $8.5 trillion to help ease the credit crisis. The Federal Reserve has slashed its benchmark interest rate to near zero to stimulate the economy. The federal-funds rate was at 5.25 percent in September 2007, when policy makers began cutting borrowing costs as the economy headed into a recession.

“The Fed believes it has to prop up the financial system,” Hanlon said. “The move toward quantitative easing to fight what they perceive as deflation ultimately will lead to higher rates of inflation.”

The escalating conflict between Israel and Hamas over the Gaza Strip will support gold prices, analysts said. Iran-backed Hamas seized control of Gaza last year, and the group is considered a terrorist organization by the U.S.

Iran holds the world’s second-largest petroleum reserves and sits on the narrow sea channel through which oil from the Persian Gulf is shipped. The conflict may boost energy costs and enhance gold’s appeal as an inflation hedge. Oil futures rose as much as 10 percent today.

‘Hot’ Middle East

“With the Middle East as hot as it is, I wouldn’t dream of selling,” said Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland.

Gold’s gains this year were limited as the credit crisis forced investors to sell commodities to cover losses in other markets. The metal is down 14 percent from a record $1,033.90 in March. Oil, corn, soybeans, wheat and copper also tumbled from all-time highs.

Both the CRB and the Standard & Poor’s 500 Index are down almost 40 percent this year.

“It all came down to the collapse of the credit market and everybody getting squeezed,” Zeman said. “The speculators were out in droves early in the year, and we saw the run-up in gold and oil. This whole credit crisis is unprecedented, and all the big players bailed on their commodity positions to cover losses in equities.”

Silver may outperform gold in 2009, some analysts said.

“I like gold and silver, but I like silver just a little bit better,” Hanlon of Delta Global Advisors said.

Silver futures for March delivery climbed 31.5 cents, or 2.9 percent, to $11.295 an ounce on the Comex.

Platinum futures for April delivery rose $24.10, or 2.6 percent, to $941.50 an ounce on the Nymex. Palladium for March delivery rose $4.55, or 2.5 percent, to $188.70 an ounce.

The platinum slide this year was a record. Palladium dropped the most since 2001.