Gold Prices Soar to 18-Month High on Dollar Weakness, Inflation Fears

Gold bugs pushed the gold prices to an18-month high today (Wednesday), as rattled investors focused on renewed weakness in the U.S. dollar and the looming potential for runaway inflation.

Those factors combined to push gold as high as $1,023.30 an ounce, the loftiest level since late March 2008.

The case for inflation was bolstered by several stronger-than-forecast economic reports that followed a statement by U.S. Federal Reserve Chairman Ben S. Bernanke, who said on Tuesday that the worst U.S. recession since the 1930s has "very likely" ended.

The Consumer Price Index (CPI) rose 0.4% in August after remaining flat in July according the U.S. Labor Department.  Government reports also showed industrial production increased for the second consecutive month and sales at U.S. retailers rose in August at their fastest pace in more than three years.

Meanwhile, the U.S. dollar fell to its lowest level in 11 months against a basket of six major currencies after U.S. Treasury data showed a sharp net capital outflow from the United States in July. The euro today powered to a new 2009 high of $1.4690.

Investors are also wondering how long the government will continue to inject the banking sector with stimulus measures.  In order to support lending in the credit markets the Fed has kept its benchmark-lending rate as low as zero since December 2008, while it also has authorized purchasing $1.45 trillion in mortgage-backed securities.

"The market believes that the Fed is not going to be able to withdraw the funds fast enough and that would cause inflation," Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois told Bloomberg News. "I don't believe that for a minute, but this is what the market believes."

Despite rising fears of inflation, some analysts hailed the economic news as a sign that the economy has finally found its footing.

"This is a shot in the arm for recovery. This is what we're looking for. We're looking for solid evidence...the economy is recovering and this is really the first piece of evidence that needs to fall into place." Jack Ablin, chief investment officer at Chicago-based Harris Private Bank told Reuters.

Some analysts blamed weakness in the dollar on Bernanke's comment that the U.S. recession had ended while others pointed to a report showing an increase in capital outflows.  Net capital outflows from the United States increased to $97.5 billion in July from a revised outflow of $56.8 billion in June, the Treasury Department said.

But investors have been abandoning the dollar since early July, as the nascent economic recovery robs the greenback of its safe-haven status.  The dollar has lost 2.5% to the currency basket this month and nearly 5% since early July.

"The general dollar-selling trend remains in place," Lauren Rosborough, senior currency analyst at Westpac in London told Reuters.

Silver and platinum prices rose, as well, while copper and other base metals tagged along on optimism that economic growth would boost industrial demand.

Gold futures are up 28% since Lehman Brothers Holdings Inc. went under a year ago.  Investors have increased purchases of precious metals in a flight to safety from the worst global recession since World War II.

The latest spurt in prices has many analysts wondering how high prices will go.  Any further weakening in the dollar could carry gold higher, perhaps to a new record. The all-time-record high of $1,033.90 an ounce was set last March.

"I would bet more that it's not going to happen today," Standard Bank analyst Walter de Wet told the Wall Street Journal. "I think people are just too worried to buy at these levels, (although) most people don't want to short the market."

In a column that ran today in Money Morning, Contributing Editor Peter Krauth cited both strong technical and fundamental analysis in predicting record prices in the near future.

Krauth believes investors should load up on gold mining stocks, both large and small.

"Just hold on to your hats. As the price of gold advances, gold-miners will be the "go to" stocks to play. They will benefit from leverage as the yellow metal advances in price," Krauth says.

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