16 Sep 2009

Gold Closes at Record Highs

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CNNMoney reports:

Gold prices settled at an all-time high Wednesday as the dollar slumped and inflation concerns boosted demand for the metal as a hedge against rising prices.

Gold for December delivery jumped $13.90 to close at a record high of $1,020.20 an ounce, well above the previous high of $1,003.20 that was posted March 18, 2008.

The dollar fell to a one-year low against a basket of currencies, as upbeat economic data boosted optimism about the global economic recovery and gave investors an appetite for more risky assets, such as stocks.

Mark Hansen, director of trading at commodities research firm CPM Group, said the weak dollar is the “main driver” of Wednesday’s gold rally.

At the same time, gold prices are being supported by concerns that government efforts to stimulate the economy could result in a bout of inflation a few years from now. “That has given investors more of an appetite for tangible assets,” Hansen said.

The inflation concerns come despite a government report that showed consumer prices remained relatively tame last month.

The Labor Department’s Consumer Price Index rose 0.4% in August from the month before due to higher energy prices. Over the past 12 months, CPI has declined 1.5%.

“Because inflation is really not an issue now, investors are looking out a year or two and wondering what happens if there’s not a timely withdrawal,” of economic stimulus dollars, Hansen said.

Investors view gold as a hedge against rising prices because tangible assets tend to hold value better than equity-based assets when inflation is an issue.

Looking ahead, gold prices could head even higher, Hansen said.

Market participants have become “more comfortable” with gold prices above $1,000 and that has “emboldened investors to think that market can go higher,” he said.

As long-time Free Advice readers know, the parts in bold above are quotes that I consider to be dumb. Note that I’m not saying there’s a conspiracy here. I think a few writers say, “0.4% inflation in one month is tame” and then everybody else follows suit. A guy trying to make his deadline isn’t going to pull out a calculator and say, “Wait a second, that’s 4.9% a year! We’re saying that’s tame inflation? Did I miss something? Have we always been at war with Eastasia?”

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