Hopefully a lot of folks will google "gold" while they're feeling lucky. JMR
By Gertrude Chavez http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=3353162
NEW YORK, Aug. 28 (Reuters) -- The recent spike in the price of gold -- a safe haven for risk-averse global investors -- could jeopardize U.S. stocks and bonds, undermining a nascent dollar recovery.
Investors' motivation to seek refuge in more tangible commodities is partly the heightened security worries ahead of the second anniversary of the Sept. 11 attacks in the United States and partly the waning prospects of dollar-denominated asset markets, analysts said.
"Gold is the barometer of geopolitical tensions. If more people are investing in gold, that's telling you something is not right about the present geopolitical climate," said Philip Capone, a foreign exchange trader at Fortis Bank in New York.
Indeed, there may be some cause for apprehension. Recent reports in Britain's Sunday Telegraph that Al-Qaeda is plotting to hijack an aircraft in Britain over the next two months and Monday's lethal explosions in Bombay are yet another reminder that the U.S. war against terrorism is far from over.
After being battered for more than a year, the greenback has staged a significant rally against most major currencies over the past few weeks as a plethora of data reports have signaled the United States will once again spearhead a global economic recovery.
But with gold on a rampage, analysts say, the dollar could get hurt, albeit indirectly.
"A gold rally could harm the dollar if it results in a selloff in other asset markets such as equities and bonds," said Capone of Fortis Bank.
Already, U.S. stocks and bonds are looking vulnerable, analysts say. The stock market has faltered in recent sessions despite positive economic data because equities look increasingly fully valued.
The bond market is also in a similar slump, with improving economic prospects in the United States appearing to dispel the chances of further interest rate cuts.
Currency analysts worry that as the price of gold rises, so too will investors' antipathy toward U.S. assets. "It could incite further unrest in both the stock and bond markets, unleashing a wave of selling that could spoil the chances of a sustainable recovery," said Jes Black, currency strategist at MG Financial in New York.
From about $254 in April 2001, December gold climbed
to a three-month high of $375.40 an ounce just before noon on Wednesday in New York. The rally pushed gold to levels last seen in the aftermath of the U.S.-led war in Iraq and follows a spate of bombings in the Middle East, India, and Indonesia.
The active contract is currently trading slightly lower at around $372 an ounce on Thursday due to profit-taking.
The longer-term backdrop is a steady climb of the precious metal's price. Gold started to shine again back in 2001 after a protracted bear market as the dollar's decline and financial market turmoil gave the yellow metal, with its steady purchasing power and historic monetary role, newfound luster.
As the global economy slowed, gold also gained attraction as one way of insuring against the threat of deflation -- or an environment of persistently falling prices.
"The low interest rate environment has helped gold, contrary to some perception," said David Meger, director of metals trading, at Alaron Trading Corp in Chicago. "While low interest rates do not allow much for lending by bullion banks, this has created less selling in the marketplace," he said.
But after being trapped in a deflationary environment for many years, Japan -- the world's second biggest economy -- is now showing signs of recovery along with the United States, even raising the specter of an eventual resurgence of inflationary pressures.
Analysts also say the rise in gold is signaling inflationary expectations, a precursor to a possible fall in the dollar. High inflation can be closely associated with weakness in the U.S. currency because it induces monetary tightening and causes the contraction of dollar supply in the monetary system.
Black of MG Financial in New York said that with the shift to gold, markets are already pricing in inflation. And the more inflation rises, the more investors would want to hold onto gold as a hedge.
Already, gold traders are talking about the possibility of the yellow metal climbing higher to over $400, a level last seen in the mid-1990s.
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