Gold heads to $1,100; hits fresh record

Copper contract sits out major metals’ push higher

By Moming Zhou & Polya Lesova, MarketWatch

NEW YORK (MarketWatch) — Gold futures surged to record highs above $1,090 an ounce Wednesday as the dollar sold off and buyers piled onto the precious metal’s recent rise amid bets the Federal Reserve would maintain its ultraloose monetary policy.

After settling with modest gains, gold futures perked up in electronic trade after the Fed released its statement, repeating that economic conditions “are likely to warrant exceptional low levels of the federal funds rate for an extended period.” It kept rates near zero percent.

December gold, the most active contract, rose to $1,092.1 an ounce, up from a floor settlement of $1,087.3 an ounce, as the U.S. dollar sold off further.

“The Fed reiterated the fact that they’ll keep interest rates low to stimulate growth, which will ultimately lead to a weaker dollar and higher inflation,” said David Beahm, vice president in economic research at Blanchard & Co. in New Orleans.

Combined with demand from central banks, the continued drop in the U.S. dollar “is a great recipe for gold,” he said.

New records

After trading followed an active session that drove prices to new records near $1,100 an ounce.

During the regular session, gold for November delivery rose to $1,094 an ounce on the Comex division of the New York Mercantile Exchange, the highest level for a Comex front-month contract. The thinly traded contract ended up 0.2% at $1,086.70 an ounce.

Gold for December delivery, the most actively traded contract, also ended up 0.2% on the session, at $1,087.30 an ounce, after setting an intraday high of $1,096.50 an ounce.

Central banks in China, Russia and other major emerging markets have indicated “interest in building their holdings of gold as part of their diversification away from the U.S. dollar,” said Nicholas Brooks, head of Research and Investment Strategy at ETF Securities.

“This appears to be a structural change that may support the gold price on a medium- to longer-term basis,” he said.

The dollar extended its decline after the Fed statement. Gold prices tend to rise when the dollar falls, because the currency’s deterioration makes hard assets more valuable.

The dollar index (INDEX:DXY) , which tracks the performance of the greenback against a basket of other major currencies, fell 0.6% to 75.82. See Currencies.

Investors’ interest also returned in gold exchange-traded funds. Holdings in SPDR Gold Trust (NYSE:GLD) , the biggest gold ETF, rose to 1,108.40 metric tons as of Tuesday, up nearly 5 metric tons from the prior day.

“Inflows into physically backed gold ETFs indicate the move into gold has been gathering pace over the past year,” said Brooks.

Gold broke atop key technical levels on Tuesday, gaining after the International Monetary Fund said it sold 200 metric tons of gold to the Reserve Bank of India, part of a total of 403.3 metric tons of gold approved for sale in September. See Tuesday’s Metals Stocks.

Tom Pawlicki, analyst at MF Global, said he expects “gold prices to make further upside progress over the near term.”

“Support will come from IMF sales to India, planned dehedging by Barrick, hedge-fund purchases, and technical factors,” Pawlicki wrote in a note to clients.

Earlier this week, Barrick Gold Corp. (NYSE:ABX) (TSX:CA:ABX) said it reduced its hedge book by 1 million ounces of gold in October.

In other metals action, December silver rose 1.3% to $17.405 an ounce during the floor session. January platinum gained 1% to $1,369.30 an ounce, as December palladium added 0.3% to $328.80 an ounce.

Bucking the trend, December copper slid 1.3% to $2.993 a pound.

In economic news Wednesday, the Institute for Supply Management index showed business conditions improved in October across a narrower group of companies in the U.S. nonmanufacturing sectors. The ISM nonmanufacturing index fell to 50.6% from 50.9% in September, short of economist estimates. See full story.

Also, payrolls provider ADP said private-sector firms in the U.S. cut 203,000 jobs in October, the fewest jobs lost since July 2008. See Economic Report.

Barrick reduces gold hedges

Toronto-based Barrick plans to eliminate its remaining 1.9 million ounces in gold hedges by September 2010 because it wants to gain full leverage to the price of gold on all future production based on what’s perceived to be an increasingly positive outlook for the metal.

Gold hedges are contracts where Barrick has sold ounces of gold forward and will receive a fixed price upon delivering into these contracts. With these hedges, Barrick doesn’t stand to benefit from any increase in the price of gold.

Some hedge funds are also actively buying gold.

Gold may be “competing with T-bills as a place to park excess cash,” Pawlicki said. “Gold sometimes has the appearance and reputation of being a ‘risk-free’ asset.”

Gold has historically been seen as a safe-haven asset. Investors tend to buy the metal as a hedge against economic and financial turmoil.

“Central banks portray a long-term picture of things to come,” said Chintan Karnani, an analyst at Insignia Consultants in New Delhi. “If central banks are buying gold, why should retail investors be left behind?”

The rise in gold prices was also partly due to the “massive short covering and option-related buying,” he said, characterizing the Tuesday rally in gold and other commodities as “too much money chasing too few goods.”

At the same time, scrap-gold sales have ended, and Karnani expects to see greater jewelry demand at prices below the $1,050 level.

On a technical level, $1,125.40 is key resistance, he said. That level needs to be breached for gold to see further gains.

And if gold’s rally continues into next week, Karnani predicts gold prices could reach $1,200 this month.