Gold Soars Most in Six Months as Dollar Drops; Silver Climbs

March 19 (Bloomberg) -- Gold jumped the most in six months in New York after the Federal Reserve’s plan to buy debt weakened the dollar and revived concerns inflation will accelerate. Silver surged to the biggest gain in 29 years.

The dollar fell as much as 2.3 percent against a weighted basket of six major currencies. The greenback dropped 2.7 percent yesterday following the Fed’s pledge to buy as much as $1.15 trillion of Treasuries and mortgage debt to cut borrowing costs. Gold reached a record $1,033.90 an ounce on March 17, 2008, as interest-rate cuts sent the dollar to an all-time low against the euro. The metal is up 8.4 percent this year.

“Investors are worried the Fed will print as much money as they need to and this is going to lead to some insanely hot inflation, so they’re out buying gold,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “The dollar got clobbered. You print more money and it buys you less.”

Gold futures for April delivery soared $69.70, or 7.8 percent, to $958.80 an ounce on the New York Mercantile Exchange’s Comex division, the biggest gain for a most-active contract since Sept. 17.

Silver futures for May delivery rose $1.585, or 13 percent, to $13.52 an ounce on the Comex, the highest jump for a most- active contract since Dec. 31, 1979. The metal has risen 20 percent this year.

The central bank pledged to buy as much as $300 billion of Treasuries, as well as to expand purchases of mortgage-backed securities by $750 billion and of debt from government-sponsored enterprises by $100 billion, to ease credit and boost the housing market.

Gold ‘Should’ Gain

“The Fed’s purchase of Treasuries is a significant psychological step, as it becomes a de facto lender to the U.S. Treasury,” analysts at UBS AG said today in a report. “The question then becomes, where will borrowings stop? The pressure on the U.S. dollar as the government effectively prints money should result in gold prices appreciating in dollar terms.”

On Feb. 23, UBS said gold could reach $1,050 an ounce within a month.

The Fed yesterday also left its benchmark lending-rate target range at zero to 0.25 percent and said it may keep it there for an “extended” time.

“With the interest-rate tool out the window, the Fed is cranking up the printing press,” LaSalle’s Zeman said.

Central banks are lowering borrowing costs and spending trillions of dollars in response to the worst financial crisis since the Great Depression. That may devalue currencies and boost demand for bullion as an alternative investment.

‘Far From Recovery’

“The effects of the announcement were magnified as it portrayed the fact that perhaps the economy is far from recovery,” Emanuel Georgouras, a precious-metals trader at Marex Financial Ltd. in London, wrote today in a note. “Should quantitative easing continue, you can expect to see further gains in gold.”

For most of this year, gold and the dollar have abandoned their traditional inverse relationship as investors bought both assets to hedge against turmoil in financial markets. The correlation may resume after the Fed’s announcement, analysts said.

Assets in the SPDR Gold Trust, the biggest ETF backed by bullion, expanded 1.4 percent to a record 1,084.33 metric tons yesterday, according to the company’s Web site.

ETF Securities Ltd.’s exchange-traded products backed by bullion attracted almost $134 million last week, the company said today.

Gold’s rally after the Fed’s announcement is “insane” because U.S. inflation may not accelerate until 2011, said Peter Fertig, owner of Quantitative Commodity Research Ltd.

“There’s no real spillover from the monetary system to the real economy yet,” Fertig said today by phone from Hainburg, Germany. “The U.S. is far from inflationary pressures. It will take some time before the gap is closed.”