Gold Rises to 10-Week High as Iran Tensions Mount; Silver Gains

By Pham-Duy Nguyen

July 1 (Bloomberg) -- Gold rose to the highest in almost 10 weeks on speculation that mounting tensions over Iran's nuclear program will spur investor demand for a haven from market turmoil. Silver also gained.

Crude-oil futures, which doubled to a record in the past year, jumped as much as 2.4 percent today after ABC News reported Israel is likely to attack Iran, OPEC's second-largest producer. The Dow Jones Industrial Average has tumbled into bear-market territory. Gold has rallied 45 percent in the past year, and UBS AG forecast a higher average price for the metal.

``Gold is always a safe-haven asset,'' said Matt Zeman, a metals trader at LaSalle Futures Group Inc. in Chicago. ``You've got inflation, geopolitical risk, extremely high oil prices and a weak economy. All the pieces of the puzzle are there for gold to go higher.''

Gold futures for August delivery climbed $16.20, or 1.7 percent, to $944.50 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price for a most-active contract since April 16.

Silver futures for September delivery climbed 78 cents, or 4.5 percent, to $18.29 an ounce. It was the biggest percentage gain for a most-active contract since March 5. The metal rose 1.2 percent in the second quarter while gold gained 0.7 percent.

Israel may bomb Iran if the Persian Gulf nation acquires enough uranium to build a weapon, potentially threatening Mideast oil supplies, ABC said, citing a Pentagon official it didn't name. The 30-stock Dow Industrial average fell as much as 1.5 percent, surpassing the 20 percent decline from its recent peak, in October, that can signal the start of a bear market.

Almost a quarter of the world's oil flows through the Strait of Hormuz, a narrow waterway between Iran and Oman at the mouth of the Persian Gulf.

IEA Forecast

Oil futures rose as high as $143.33 a barrel in New York after reaching a record $143.67 yesterday. The International Energy Agency said demand may exceed production through 2013.

``Crude-oil prices remain in the driver's seat in the markets and are still seen as the primary factor impacting the dollar, gold, stocks and readings on inflation,'' Jon Nadler, an analyst at Kitco Minerals & Metals Inc. in Montreal, said in a report.

Gold reached a record $1,033.90 on March 17 as the Federal Reserve reduced U.S. borrowing costs, sending the dollar to an all-time low against the euro and commodities such as corn, wheat and copper to record prices.

The average gold price will be $895 an ounce this year, UBS projected today, up from an earlier forecast of $851.

Rally's Limits

Still, the metal's rally may be limited after seven straight annual gains, analysts said.

``You can't eat gold or put it in your gas tank, so how much more do investors feel there is in this?'' Miguel Perez- Santalla, a vice president at Heraeus Precious Metals Management in New York, said in an e-mail.

Gold will average $800 an ounce next year and $730 in 2010, UBS said.

``With UBS's views that the dollar will firm in 2008, inflation will decline and that the worst of the credit crunch should be felt this year, we expect some of this unusually strong investment demand will slow and even reverse,'' UBS said.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.
Last Updated: July 1, 2008 14:24 EDT