Gold May Surpass Record High on Weaker Dollar, Baker Steel Says

By Debarati Roy

Oct. 10 (Bloomberg) — Gold prices may surpass record-high levels next year as the dollar weakens and economic expansion in China and India spurs demand for jewelry, according to Baker Steel Capital Managers in London.

Bullion may reach $700 an ounce by year-end, and next year surpass the record $850 set January 1980, said Trevor Steel, who manages $600 million in commodity assets at Baker Steel on Oct. 6. The metal traded at $578.40 at 10:33 a.m. in Sydney.

Gold has risen for five years as a weaker dollar and rising oil prices led investors to buy it as an alternative investment and an inflation hedge. The direction of the dollar will drive gold prices in the coming year, according to Barrick Gold Corp., the world’s largest gold mining company.

“Gold will rise because of the structural weakness in the dollar,” said Steel, who’s been tracking the bullion industry for the past 15 years and is speaking at a three-day conference in Hong Kong that runs from today to Oct. 12. “The drop is temporary.” Gold usually moves counter to the U.S. currency.

Steel’s company runs the Genus Dynamic Gold Fund, which invests in gold miners and futures, and has returns of 20.2 percent this year, compared with an 8.2 percent rise in the Standard & Poor’s 500 Index.

The dollar may weaken as the U.S. economy slows, leading the Federal Reserve to cut interest rates next year, Citigroup Inc. said Oct. 2. The dollar has shed 7 percent this year against the euro this year.

`Meaningful’

The U.S. economy grew 2.6 percent in the quarter ended June 30, slower than the 5.6 percent in the previous quarter, increasing the chance the Federal Reserve will refrain from raising borrowing costs at its Oct. 25 meeting. Interest-rate futures contracts show traders see a 6 percent chance rates will be cut to 5 percent by February. The contracts predicted no chance of a cut as recently as Sept. 18.

Gold for immediate delivery has dropped 21 percent from a 26-year high of $730.4 an ounce on May 12, pacing a decline in oil prices. The price of oil futures, a key driver of inflation, has dropped 24 percent from a record $78.40 a barrel on July 14.

“I often wonder if inflation is a driver for gold,” Greg Wilkins, chief executive officer of Barrick, said at a conference in Australia last week. “What we see with inflation is the Fed’s tightening, and higher interest rates are negative for gold. I think its going to be more the U.S. dollar trade as a driver of interest in gold.”

China, India

Rising jewelry demand for gold is also expected to support prices of bullion, as mining companies struggle to bring on new capacity, Steel said.

China and India, the fastest growing major economies, are two of the biggest buyers of gold. India alone accounted for 23 percent of world demand last year.

“The fundamentals supporting gold haven’t changed and the bull run will continue for the next five years,” said Steel. “Even if a mine is discovered, it may take five to seven years for production to begin.”

Production in the first half of this year fell 1.5 percent, according to Toronto-based Barrick.

Steel isn’t alone in forecasting that gold prices may cross its all-time high. Citigroup, the world’s biggest financial services company, on Oct. 2 said bullion may test the record. GFMS Ltd., a London-based metals researcher, said April 12 prices may even exceed the all-time high.

Jim Rogers, the former George Soros partner who foresaw the start of the commodity rally in 1999, predicted in April gold would soar to $1,000 an ounce.

To contact the reporter for this story: Debarati Roy in Mumbai at droy5@bloomberg.net

Last Updated: October 9, 2006 20:52 EDT