Gold Rebounds on U.S. Fed Decision to Flood System With Dollars

By Feiwen Rong

Oct. 14 (Bloomberg) -- Gold climbed for the first time in three days as the U.S. decision to flood the financial system with unlimited dollars fueled concern inflation may rise, boosting the precious metal's appeal as an alternative asset.

The Federal Reserve yesterday led an unprecedented push by central banks to inject the financial system with as many dollars as banks want, backing up government efforts to revive confidence and helping to reduce money-market rates. World stocks rallied after about $28 trillion in value was erased from the world's stock markets this year. Commodities gained.

``People aren't sure whether the pumping of all this cash is inflationary, and also the continuing uncertainty about other markets,'' Charles Dowsett, head of structuring and trading of precious metals at ABN Amro Holding NV in Sydney, said by phone.

Bullion for immediate delivery jumped as much as $18.67, or 2.2 percent, to $851.72 an ounce before trading at $846.25 at 1:09 p.m. in Singapore. Silver for immediate delivery jumped 2.7 percent to $10.99 an ounce.

Asian stocks surged, extending a global rally after the U.S. and European governments agreed to buy stakes in banks to unlock credit markets. Japan's Nikkei 225 Stock Average today soared as much as 13.8 percent. U.S. stocks staged the largest rally yesterday in seven decades.


Premiums Rise

There's an increasing premium being paid for physical gold by gold investors, an indication physical gold demand is robust and ``futures contracts are losing credibility,'' Greg Canavan, Sydney-based analyst at Fat Prophets Management Ltd., said today.

``With each recent crisis, the Fed has pumped more money into the system,'' Canavan said. ``As the public's trust in paper money slowly evaporates as supply becomes more and more prevalent, gold will continue to rise.''

December-delivery gold gained 0.7 percent to $848.40 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange. Gold for December delivery in Shanghai fell 2.6 percent to 186.60 yuan a gram ($850 an ounce).

Still, some investors think gold may fall in the short-term.

``I think gold prices will come down somewhat simply because everything has been sold down and people still have some gains on gold,'' Marc Faber, author and publisher of the Gloom, Boom & Doom report, said today in an interview with Bloomberg Television in Singapore.

``And as markets may recover between now and, say, next March, somewhat, I think a false sense of security will come back into the market place and people will not be that interested in gold,'' Faber added.

Gold for August delivery fell 4.6 percent to 2,776 yen a gram ($844 an ounce) on the Tokyo Commodity Exchange at 2:08 p.m. local time after the market was closed yesterday for a national holiday.

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