Gold Advances as Investors Seek Alternative to Declining Dollar

By Kim Kyoungwha

Oct. 20 (Bloomberg) -- Gold gained, reversing an earlier loss, as the dollar dropped to a 14-month low against the euro, fueling demand for the metal as an alternative investment.

Hedge funds and other large speculators hold their most- bullish position ever in futures, helping to propel gold’s gains for the year to 21 percent as a weaker dollar and rising government debt spur concern that inflation may accelerate. Spot gold touched an all-time high of $1,070.80 on Oct. 14.

“There are long positions building up,” said Darren Heathcote, head of trading at Investec Bank Ltd. in Sydney. “There’s a pretty good reason for it as we continue to see the U.S. dollar weaken daily. The market is becoming more comfortable with diversification and more people are looking to get gold.”

Gold for immediate delivery was up 0.2 percent at $1,065.92 an ounce at 2:04 p.m. in Singapore, after showing a loss of 0.2 percent. Oil topped $80 a barrel in New York. The euro touched $1.4994, the highest level since August 2008.

So-called net-long positions, or bets prices will rise, increased 6 percent to 253,955 contracts in the week ended Oct. 13, according to data from the Commodity Futures Trading Commission.

The Dollar Index extended its decline for a second day, taking this year’s loss to 7.5 percent, after Australia’s central bank said in minutes of its Oct. 6 meeting that a “very expansionary setting of policy was no longer necessary, and possibly imprudent.” The index fell 0.4 percent to 75.177.

“Seasonal factors in the final quarter for both gold prices and the dollar are in favor of further gains,” said Stefan Graber, an analyst with Credit Suisse Group in Singapore. “Accordingly, we think the market is likely to test and eventually break the $1,100 mark.”

Physical Demand

Gold will average $1,200 an ounce in the third quarter of next year, Standard Chartered Bank forecast yesterday. UBS AG lifted its one-month estimate to $1,000 an ounce from $950, and its three-month forecast to $1,050 from $1,000.

“Physical demand for gold from jewelry clients, although generally light over the past six weeks, has been seen in good strength on corrections in the price,” John Reade, an analyst with UBS AG, said in a report.

The recent rally to a record may prompt some investors to sell their positions, according to Commerzbank AG.

“While many speculators had rushed to jump onto the bandwagon, an expanding minority of short-term oriented investors is betting on falling gold prices,” Eugen Weinberg, a senior analyst with Commerzbank, wrote in a note.

Among other precious metals, platinum gained as much as 0.8 percent to $1,369.25 an ounce, the highest since September 2008, before trading at $1,365.75 an ounce. Silver was little changed at $17.84 an ounce, and palladium rose to a 14-month high of $336.25 an ounce before trading at $336.

To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net