Gold Gains as Crude Rises, Spurring Demand for Inflation Hedge

By Feiwen Rong

June 24 (Bloomberg) -- Gold rose as crude oil traded above $137 a barrel for a second day, spurring demand for the precious metal as a hedge against inflation. Silver also gained.

Crude oil futures rose for a third day in New York amid signs that an increase in output by Saudi Arabia may not boost supply enough to make up for disruptions in Nigeria. Gold has gained 6.2 percent this year as crude oil soared 43 percent. Investors usually buy gold to preserve buying power amid rising inflation.

``Gold is supported by the inflation scare, especially in emerging markets such as China and India,'' Wei Yanan, an analyst at Jingyi Futures Co., said today by phone from Shanghai.

Bullion for immediate delivery climbed 0.2 percent to $885.75 an ounce at 10:24 a.m. in Singapore, paring yesterday's 2.1 percent decline that was driven by the dollar's gain against the euro. Silver rose 0.3 percent to $16.845 an ounce.

An agreement yesterday by Baosteel Group Corp., China's largest steelmaker, to pay about 80 percent more for iron ore from Rio Tinto Group further stoked inflationary concern as manufacturers will try to pass cost increases, Wei said.

China's producer prices accelerated 8.2 percent last month, their fastest pace in more than three years. Consumer prices in the world's largest consumer of commodities gained 7.7 percent in May, beating the government's annual target of 4.8 percent.

Fed Decision

Still, gold's gains may be limited amid expectations that the dollar may rise before Federal Reserve policy makers agree this week to keep the benchmark interest rate on hold at 2 percent, Wei added. The Fed is scheduled to convene for a two-day meeting today.

The dollar was little changed today against the euro before an industry survey that may show U.S. consumer confidence slumped to the lowest since 1992 amid a housing recession. The dollar traded at $1.5519 against the euro at 9:00 a.m. in Singapore.

Gold for August delivery was little changed at $888 an ounce in after-hours electronic trading on Comex at 9:44 a.m. Singapore time.

Gold for April 2009 delivery fell 46 yen, or 1.5 percent, to 3,103 yen a gram ($894 an ounce) on the Tokyo Commodity Exchange at 10:45 a.m. local time. Gold for December traded in Shanghai fell 2 percent to 196.61 yuan a gram ($890 an ounce).

To contact the reporter for this story: Feiwen Rong in Singapore at frong2@bloomberg.net