Gold, Silver Rally on Concern Oil Gains Will Spark Inflation
April 17 (Bloomberg) -- Gold rose to a 25-year high in New York, and silver topped $13 an ounce, on concern that a dispute over Iran's nuclear ambitions may lead to a disruption in oil exports, boosting global energy costs and spurring inflation.

Crude oil rose to a record in London and is up 40 percent in the past year, contributing to a 42 percent rally in gold. Iran's President Mahmoud Ahmadinejad, disregarding U.S. pressure to halt uranium enrichment, said the country will use its power to serve ``friends,'' the Iranian news agency said yesterday.

``Gold is reacting to the strength in oil and the probability that inflation will rear its ugly head,'' said George Ireland, chief investment officer of Boston-based Geologic Resource Partners, a $300 million venture capital and hedge fund.

Gold futures for June delivery rose $9.70, or 1.6 percent, to $609.80 an ounce at 9:08 a.m. on the Comex division of the New York Mercantile Exchange, after reaching $610.80, the highest since January 1981. The Comex was closed April 14. Gold for immediate delivery rose $3.43 to $606.42 at 2:09 p.m. in London.

Silver rose 37 cents, or 2.9 percent, to $13.225 an ounce on Comex, after earlier reaching $13.33, the highest since March 1983. Silver has jumped 86 percent in the past year.

Iran is ready to share its technology with ``poor peoples of the world,'' Ahmadinejad said. In London, Brent crude oil for June delivery rose to an all-time high of $71.40 a barrel today on the ICE Futures Exchange and crude oil on the Nymex earlier reached $70 a barrel.

`Inflammatory Comment'

``Oil prices and continued inflammatory comments from Iran are driving gold,'' said Daniel Vaught, an analyst at A.G. Edwards & Sons Inc. in St. Louis.

Gold is up 17 percent this year on speculation the rally in energy and metals prices will boost the cost of consumer goods. The Goldman Sachs Commodity Index is up 9.3 percent this year, led by gains in silver, copper, gasoline and gold. U.S. consumer prices probably rose 0.4 percent last month, up from 0.1 percent in February, a Bloomberg survey showed.

Some investors buy gold when energy prices rise as it can signal higher inflation, which erodes the value of fixed-income assets such as bonds. Gold futures surged to $873 an ounce in 1980, when U.S. consumer prices rose 12.5 percent from the previous year.

``We're in the throes of a protracted bull market,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``This is a fund-buying frenzy. It's being fed by investor interest. You're seeing the metals inflating against all paper currencies.''

Hedge Funds

Hedge-fund managers and other large speculators increased their net-long position in Comex gold by 30 percent in the four weeks ended April 11, reports from the U.S. Commodity Futures Trading Commission show.

Speculative long positions, or bets prices will rise, outnumbered short positions by 124,332 contracts as of April 11, up from 95,940 on March 14, CFTC data show.

Investors are snapping up bullion in all currencies as an alternative to stocks and bonds, analysts said. Gold sold in yen has gained 16 percent this year while gold sold in euros has climbed 13 percent. Last year, the metal gained 36 percent in both currencies while gold sold in dollars gained 18 percent.

``Gold is a currency,'' said Ireland, whose fund invests in mid-tier mining companies. His firm also owns 276,293 shares of StreetTracks Gold Trust, an exchange-traded fund that holds gold.

Silver has gained more than $3 since January in anticipation of U.S. government approval for Barclays Plc's exchange-traded fund linked to the price of the precious metal. The fund makes it easier to own the metal and is modeled on a similar gold fund which has generated $6.9 billion in investment since its debut in November 2004.

``If you're not in at all, it's sort of a stand-aside moment,'' McGhee said. ``Silver is a little pricey. I'm more comfortable buying gold than silver if I'm not already in the market.''



To contact the reporters on this story:
Julie Tay in London at jtay1@bloomberg.net;
Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.
Last Updated: April 17, 2006 10:05 EDT