Gold futures climb back to 1988 levels
SAN FRANCISCO (CBS.MW) -- Gold futures climbed above $440 an ounce to close at their highest level since 1988 Tuesday, as signs of inflation sparked fresh investor interest in the precious metal.
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"Gold has legs to move," based on the reported 1.7 percent climb in the producer price index last month -- the most since January 1990, said John Person, president of National Futures Advisory Service. See Economic Report.
"Interest rates are still relatively inexpensive, which makes gold a favorite hedge against a rise in the U.S. dollar," he said. "The Fed raises rates to combat inflationary pressures, but they risk choking off the economy's growth momentum, so this makes buying gold even that much more attractive as many doubt they will be overly aggressive in their interest rate hiking campaign."
Against this backdrop, gold for December delivery closed at $440.50 an ounce on the New York Mercantile Exchange, up $3.20 for the session after tapping a high of $441.40 earlier. Prices haven't traded at these levels since July 1988.
"Earnings last quarter for companies in the S&P 500 Index rose about 17 percent based on the share-weighted average of the 462 companies that released results by Nov. 12" -- that's the smallest increase since the second quarter of 2003, said Person.
"This shows that earnings are decelerating, and that shows the economy is definitely going to be struggling," he said.
Combined with the PPI data, it all "spells trouble ahead for the Fed who must try to balance inflation while not curtailing the economy's growth momentum," said Person.
"If the Fed sees inflation as a threat, they will aggressively raise rates-- that is bad for stocks and bonds, but supportive for gold," he explained. The situation would make gold more attractive "as a hedge against losses in paper assets, until the Fed takes control of the situation."
From here, Kevin Kerr, president of Kerr Trading International expects prices to climb to $475. "Interest rate fears are driving this market and it looks like little will put the brakes on the rally," he said.
If prices break through the $446 to $450 level, "there's little doubt that the market will continue on its track for $500 and beyond," said Dale Doelling, chief market commentator at Bullion.com in Chicago.