Gold Gains in London as Rising Oil, Weaker Dollar Spur Demand

By Nicholas Larkin

Jan. 14 (Bloomberg) -- Gold rose in London as higher energy prices and a weaker dollar increased the metal’s appeal as a hedge against inflation and an alternative investment.

Oil gained for a second day after OPEC leaders said they may deepen output cuts. The dollar declined from a five-week high against the euro on speculation reports this week will show U.S. retail sales and manufacturing weakened as a recession spread through the world’s largest economy.

“There’s been a recovery in oil prices the last couple of days and that’s renewing the idea of potential inflation going forward,” Dan Smith, an analyst at Standard Chartered Plc in London, said by phone. “The weakness in the dollar is giving gold a little bit of a boost.”

Gold for immediate delivery climbed as much as $7.40, or 0.9 percent, to $829.40 an ounce and traded at $827.17 an ounce by 11:07 a.m. in London. February futures added $6.10, or 0.7 percent, to $826.80 in electronic trading on the Comex division of the New York Mercantile Exchange.

The metal rose to $827.25 an ounce in the morning “fixing” in London, used by some mining companies to sell production, from $826.50 at the afternoon fixing yesterday.

Bullion yesterday reached a one-month low of $814.66 an ounce in London as the dollar strengthened on speculation the European Central Bank will cut interest rates tomorrow. Gold is down 6.3 percent this year. The commodity climbed 5.8 percent last year, the smallest increase since 2004.

A report at 8:30 a.m. in Washington will probably show sales at U.S. retailers fell for a sixth consecutive month as rising unemployment caused consumers to retrench, according to a Bloomberg survey of economists. The ECB may lower borrowing costs tomorrow by at least 50 basis points to 2 percent, Eonia forward contracts indicate.

Gold Outlook

Gold will reach $1,000 an ounce by the end of this year and $2,000 by the end of 2010, Philip Manduca, London-based head of investments at ECU Group Plc, said in a Bloomberg television interview. Investors should take a long-term position on gold as central banks inject more cash into the banking system, he said.

“Gold isn’t just a hedge against inflation,” Manduca said. “There seems to be very little store of value going on in paper” currencies, he said.

Among other metals for immediate delivery in London, silver added 0.3 percent to $10.79 an ounce. Platinum gained $15.50, or 1.6 percent, to $959 an ounce and palladium was 0.6 percent higher at $185 an ounce.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net