Gold may gain for a second week on expectations the dollar will extend its slide against major currencies including the euro, spurring investors to buy the metal as an alternative asset.

Source: [1] Bloomberg

Gold May Advance on Expectations Dollar’s Slide Will Continue

By Danielle Rossingh

Nov. 27 (Bloomberg) — Gold may gain for a second week on expectations the dollar will extend its slide against major currencies including the euro, spurring investors to buy the metal as an alternative asset.

Sixteen of 26 traders, investors and analysts surveyed by Bloomberg News from Sydney to Chicago on Nov. 22 and Nov. 23 advised buying gold, which gained 2.7 percent last week in London to $638.20 an ounce. Five respondents recommended selling the metal, and five were neutral.

The dollar fell to a 19-month low against the euro on Nov. 24. President George W. Bush’s economic advisers said last week U.S. growth will slow next year, reflecting a slump in the housing market. That prospect is fueling speculation the Federal Reserve will cut its benchmark interest rate next year, reducing returns on dollar-denominated assets.

“We are bearish on the dollar, and in turn bullish on gold,'’ said Paul Walker, chief executive officer of London- based research company GFMS Ltd. “You have the twin deficit and the housing slump in the U.S. There has to be a move out of the dollar into alternative investments such as gold.'’

Gold for December delivery gained 1 percent to $629 an ounce last week on the Comex division of the New York Mercantile Exchange. The move was in line with the forecast of a majority of analysts surveyed Nov. 16 and Nov. 17. Bloomberg’s survey has forecast the direction of prices accurately in 82 of 135 weeks, or 61 percent of the time.

Counter Moves

The dollar and gold often move in opposite directions. The correlation coefficient for gold and the euro is 0.545 based on the coincidence of closing daily gains and declines this month. A reading of -1 would indicate prices move opposite each other, while 1 would signal they move in lockstep.

Gold for immediate delivery is headed for its sixth consecutive annual gain, the longest winning streak since central banks allowed the price of bullion to find its own level in the free market in 1968. Investors are speculating the metal will continue to outperform stocks and bonds.

Bullion prices have more than doubled in the past five years, while the Standard & Poor’s 500 Index of shares has gained 22 percent. U.S. Treasuries have returned about 21 percent including reinvested interest, Merrill Lynch & Co. indexes show.

“It remains a dollar story,'’ said Sunil Ramrakhiani, head of IL&FS Investsmart Commodities Ltd. in Mumbai. “We have been betting on this for long.'’ Ramrakhiani forecasts bullion will trade between $621 and $650 an ounce next week.

The euro on Nov. 24 rose to $1.30 for the first time since April 2005 after the French government said business confidence in the region’s second-largest economy held near the strongest in five years. Confidence in Germany, Europe’s largest economy, unexpectedly advanced to a 15-year high, a report showed a day earlier.

ECB Versus Fed

European Central Bank policy maker Miguel Angel Fernandez Ordonez said Nov. 23 in Madrid that he sees further signs of inflation in the euro region, suggesting the bank will push borrowing costs higher into 2007. The ECB raised its key rate a quarter point to 3.25 percent Oct. 5, prompting the euro to gain 3 percent against the dollar.

By contrast, the Fed ended a run of 17 consecutive quarter- percentage point rate increases in August. Policy makers have kept the target overnight lending rate between banks at 5.25 percent for the past three meetings.

A wider interest-rate gap between the U.S. and Europe “will be less supportive for the dollar and positive for gold,'’ said Michael Widmer, director and head of metal research in London at Calyon, a unit of Credit Agricole. Widmer, who is forecasting the metal may rise to $650 an ounce by the end of the year, recommends investors buy gold next week.

Jewelry Demand

The gold market is also being supported by growing demand from India, the world’s biggest buyer of the metal, much of it for use in jewelry. The country imported 100 tons of bullion in September, compared with 19 tons in June, according to Walker.

Gold may also get a boost from increased political tension in the Middle East following the assassination of Lebanese Industry Minister and Christian politician Pierre Gemayel on Nov. 21, some analysts said.

His death “ will escalate Mideast tensions, and lift the price of gold,'’ said Thomas Au, principal at R.W. Wentworth & Co., a New York-based consulting company.

Gemayel’s death is the fifth of a prominent figure who opposed Syrian influence in Lebanon since the February 2005 assassination of former Prime Minister Rafiq Hariri.

Heightened political tension spurs some investors to buy gold as haven. Gold for immediately delivery surged 5.3 percent on Sept. 11, 2001, the day terrorists attacked the U.S.

To contact the reporter on this story: Danielle Rossingh in London at drossingh@bloomberg.net .