Gold, Silver Rebound on Investor Demand for Inflation Hedge

By Pham-Duy Nguyen

June 13 (Bloomberg) -- Gold rose, erasing earlier losses, on speculation that higher food and energy costs will spur inflation and boost demand for precious metals as a hedge against inflation. Silver also climbed.
A government report showed U.S. consumer prices last month rose 0.6 percent, the most since November. Corn touched a record for a seventh straight session today. Soybeans, wheat and rice prices have climbed to all-time highs this year, and crude oil more than doubled in the past year as gold gained 34 percent.
``Real interest rates remain negative,'' said James Turk, the founder of GoldMoney.com, which held $352 million in gold and silver in storage for investors at the end of May. ``Inflation is greater than the interest income you can earn on your dollars, so after adjusting for inflation, you are losing purchasing power.''
Gold futures for August delivery rose $1.10, or 0.1 percent, to $873.10 an ounce on the Comex division of the New York Mercantile Exchange. Gold touched a record $1,033.90 on March 17. This week, the price has dropped 2.9 percent, the second decline in three weeks.
Silver futures for July delivery gained 7.5 cents, or 0.5 percent, to $16.56 an ounce on the Comex. The price advanced 11 percent this year, while gold climbed 4.2 percent.
Consumer prices rose 4.2 percent in the 12 months ending May 31, the Labor Department said today. Gold rallied 31 percent last year as consumer costs accelerated 4.1 percent, the most in 17 years.
Dollar, Oil
Still, gold traded lower most of the session as the dollar headed for the biggest weekly gain in three years against the euro. Crude-oil prices dropped 2.5 percent this week after climbing 8.8 percent last week.
The U.S. currency climbed on speculation the Federal Reserve will raise interest rates to contain inflation.
Gold rallied 39 percent from Sept. 17 to March 17 as the Fed slashed borrowing costs, after a housing slump and a credit squeeze threatened to push the U.S. economy into a recession.
The benchmark federal-funds rate is at 2 percent, down from 5.25 percent in mid-September after seven reductions. Interest- rate futures show a 50 percent chance the Fed may raise the rate to 2.25 percent by Aug. 5, compared with no chance a month ago.
``The specter of higher interest rates is negative'' for gold, said William O'Neill, a partner at Logic Advisors in Upper Saddler River, New Jersey. ``The dollar is the key to the recent slide, with oil taking on a secondary role. I see gold falling below $850 next week.''
Crude oil dropped as low as $133.46 a barrel today. The record high is $139.12.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.