Gold Rises as Dollar Slump, Oil Gain Spur Demand From Investors

July 20 (Bloomberg) -- Gold climbed to a five-week high as a weaker dollar and higher oil prices boosted the metal’s appeal as an alternative investment and a hedge against inflation. Other precious metals also gained.

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, fell to a six-week low on speculation that European and U.S. economic reports this week will show the global recession is easing, sapping demand for a refuge from risk. Oil climbed to the highest in almost two weeks.

“Gold is moving up today due to the lower U.S. dollar,” said Lannie Cohen, the president of Capitol Commodity Services Inc. in Indianapolis.

Gold futures for August delivery gained $11.30, or 1.2 percent, to $948.80 an ounce on the New York Mercantile Exchange’s Comex division. Earlier, the price reached $955.40, the highest for a most-active contract since June 12.

Bullion for immediate delivery in London rose $12.32, or 1.3 percent, to $949.82 an ounce at 7:52 p.m. local time, after earlier reaching $955.28, the highest since June 12.

“Gold is now trading like a currency and is rapidly becoming the preferred currency of choice,” Cohen said by e- mail. “Central banks throughout the world are printing money at a rapid pace, and soon investors will lose complete faith in paper currencies. At that time, within the next one to three years, gold will soar to $1,600 and beyond.”

The precious metal will have “short-term resistance” at $963, while a close above $993 would spur a “quick rally” to $1,250, Cohen said.

Prices Under Pressure

In the near term, “the healthier macro outlook, together with weak physical demand, has put gold prices under pressure,” Barclays Capital analysts including Gayle Berry and Suki Cooper in London, said today in a report. “We see potential for gold to strengthen later in the year,” they said.

Barclays expects spot-gold prices to average $940 an ounce this year and $970 in 2010, according to the report. Silver spot prices are expected to average $13.50 an ounce in 2009 and $14.20 next year, according to the report.

Gold increased to $952.75 in the London afternoon “fixing,” the price used by some mining companies to sell their output, from $952.25 in the morning fixing.

“The underlying driver is the dollar,” Dan Smith, a Standard Chartered Plc analyst in London, said by telephone today. “There’s a general rally across the commodity complex.”

Oil Gains

Crude-oil futures, used by some investors as an inflation gauge, climbed as much as 2.1 percent to $64.90 a barrel in New York. Oil advanced 6.1 percent last week, while the dollar index fell 1.1 percent, the most in almost two months. Gold tends to rise when the U.S. currency weakens.

The MSCI World Index of shares gained for a sixth day on optimism that the first global recession since World War II is easing. A global recovery may accelerate the pace of inflation.

“There’s more positive sentiment for the economic outlook,” Smith said. “Gold is benefiting from that.”

The fact “that the bond market is weakening and that the energy market is strengthening is forcing our hand,” Dennis Gartman, an economist in Suffolk, Virginia, wrote in his Gartman Letter today. “We are coming back to gold as a buyer this morning.”

Silver for September delivery climbed 22.2 cents, or 1.7 percent, to $13.625 an ounce. The most-active contract has risen for five straight sessions, the longest advance since January.