SAN FRANCISCO (MarketWatch) -- Global inflation, stock volatility, the upcoming Chinese New Year holiday -- you name it, there's a reason out there for gold's rapid rise and the likelihood it will hit a new eyeball-popping level of $1,000 an ounce.
When they're all taken together, however, the big lure to gold continues to be its tendency to hold value when the rest of the investment picture turns septic. As it's done of late, with U.S. inflation measures hitting multi-decade highs, U.S. stocks starting off the year with their biggest drop in 30 years and the global outlook looking both inflationary and at risk of a slowdown.
"It's pretty much an investment story," said Neil Meader, research director at GFMS Ltd., a London precious metals consultancy that tracks global supply and demand data for gold. "We're not really seeing supply constraints pushing the price higher; it's not really driven by fabrication demand," he said.
On Friday, the front-month futures on the New York Mercantile Exchange topped $900 an ounce for the first time, putting $1,000-an-ounce gold in the sights of some analysts. See Metals Stocks. Gold's recent rally lately has lifted shares of major miners such as Barrick Gold Corp. (ABX
Sponsored by:ABX) (CA:ABX: news, chart, profile) , Goldcorp (GG
Sponsored by:GG) (CA:G: news, chart, profile) and Newmont Mining Corp. (NEM
Sponsored by:NEM) . The Amex Gold Bugs Index (.HUI
Sponsored by:.HUI) is up 16% so far this year vs. a 5% drop in the Dow Jones Industrial Average ($INDU
Sponsored by:$INDU) .
As stock markets tumble, gold makes an attractive alternative investment. And as the dollar weakens, it acts as a hedge, notes Meader.
Among all the reasons to invest in gold, however, the bullion's ability to protect against inflation usually tops the list. And that's got some inflation-watchers worried.
"Approaching $900 an ounce does cause us to be significantly concerned about the inflation outlook, particularly because there doesn't seem to be a lot of concern from [Federal Reserve Chairman Ben] Bernanke," said Conrad DeQuadros, senior economist for Bear Stearns.
Price growth is on the run, both in the United States and abroad, largely driven by record crude-oil prices that recently topped $100 a barrel. U.S. wholesale prices in November made their biggest annual jump since 1981. U.S. import prices for December, released Friday by the Labor Department, have risen nearly 11% in the past year, the fastest rate since the early 1980's. See related story.
Energy inflation is not just squeezing U.S. motorists and manufacturers. China earlier this week took steps to freeze regulated prices of gasoline, natural gas and electricity to curb its inflation, which hit a new 11-year high of 6.9% in November. See full story.
Helping drive gold prices higher are "inflationary pressures in the Mideast and emerging markets," said Stephen Walker, gold analyst for RBC Capital Markets. "There's a strong correlation with oil prices, there's a component of geopolitical risk."
And recent statements from Bernanke suggest the Fed has put inflation on the backburner as it frets about the possibility the United States is slipping into recession, says Bear Stearns' DeQuadros.
In a speech Thursday, Bernanke said the economic outlook has taken a turn for the worse this year, positioning the central bank to take "substantive additional action as needed to support growth." See full story.
Futures traders are now expecting another 150 basis points in cuts to the fed funds rates, which now stand at 4.25%, by year-end.
These expectations, and the Fed's stance on rate cuts as telegraphed by Bernanke, are helping push gold prices higher. But if the Fed switches gears and tries to crack down on inflation, gold could lose some of its appeal.
"I think gold prices will be an early indication that the Fed has begun to reduce inflation risks," said DeQuadros.
Of course, bad times aren't the only reason gold gets bid up. Plenty of gold ends up transformed into jewelry and other personal items, particularly in India, China and East Asian countries. This demand has generally risen along with economic growth in China and other gold-loving countries. That growth, in turn, has gone hand-in-hand with commodity-fueled inflation.
Over the next few months, jewelry purchases ahead of the Feb. 7 Lunar New Year will likely support gold prices, says Walker.Laura Mandaro is a reporter for MarketWatch in San Francisco.