Gold May Top 15-Year High as Dollar's Value Falls, Survey Says

Nov. 8 (Bloomberg) -- Gold may top a 15-year high of $435 an ounce on speculation the re-election of U.S. President George W. Bush will erode the dollar's value and make precious metals more appealing than U.S. stocks and bonds, a survey showed.

Twenty-nine of 45 traders, investors and analysts surveyed from Sydney to New York on Nov. 4 and Nov. 5 advised buying gold, which is sold in dollars. Ten recommended selling the metal, and six were neutral.

Gold has surged 64 percent since Bush took office in January 2001 as the dollar slumped 28 percent. Under Bush, the U.S. trade deficit widened in August to $54 billion, the second-largest on record, prompting concern more dollars will have to be converted to other currencies to pay for imports.

"Bush getting re-elected means a bigger deficit, a weaker dollar and higher gold prices," said Graham Birch, who manages about $6.5 billion at Merrill Lynch & Co. in London. "We'll see gold at $450 before the end of the year."

Gold futures for December delivery rose 1.1 percent last week to $434.30 on the Comex division of the New York Mercantile Exchange, the eighth gain in nine weeks. Prices reached $435 on Nov. 5, the highest since December 1988, as the dollar fell to a record against the euro.

The majority of gold investors and analysts correctly forecast the market's direction 16 times in the 29 weeks since the start of the Bloomberg survey, or 55 percent.

'Political Capital'

Bush was re-elected by the narrowest popular-vote margin for an incumbent since Woodrow Wilson in 1916. Aided by expanded Republican control of Congress, Bush said he would press ahead with the war on terrorism in his new term and make permanent his $1.85 trillion in tax cuts.

"The people made it clear what they wanted," Bush said during his first White House press conference after winning the Nov. 2 election. "I earned capital in the campaign -- political capital -- and now I intend to spend it."

The U.S. needs about $1.8 billion a day in foreign capital to keep the dollar steady by funding its current-account deficit, which grew to a record $166.2 billion in the second quarter as higher prices for imported oil contributed to a wider trade gap. The current account is the broadest measure of trade because it includes investments.

The need to finance a record current-account deficit may force the U.S. dollar lower, two Federal Reserve Bank of New York economists said in an Oct. 28 report. The U.S. budget deficit swelled to a record $412.6 billion in the year ended Sept. 30, as the war in Iraq and security costs contributed to the third straight annual shortfall.

'More Deficits'

"Four more years of Bush is a gift to the gold markets -- more war, more deficits, more divisions," said Douglas Pollitt, an analyst at brokerage Pollitt & Co. in Toronto.

The outlook for government spending and divisive politics is similar to 1968, when Republican Richard Nixon defeated Democrat Hubert Humphrey for the presidency, Pollitt said. That year, deficits grew and prospects dimmed for ending the war in Vietnam, which grew increasingly unpopular, he said.

"Gold promptly went from $35 to $600 in the ensuing 12 years, amidst a macro environment of stilted growth and rampant inflation," Pollitt said.

Gold may also rise on concern of political instability in the Middle East should Palestinian leader Yasser Arafat, 75, die. Arafat, who was admitted to the Percy hospital south of Paris on Oct. 29, fell into a "reversible coma" and was "between life and death," Leila Shahid, the Palestinian representative in France, said on RTL radio on Nov. 5.

Burial Decision

Machines are keeping Arafat alive until his family and officials from France, Israel and Egypt decide where he will be buried, two unidentified Bush administration officials told the Associated Press.

Arafat, who according to Muslim custom must be buried within 24 hours of death, wants to be interred in the Al-Aqsa mosque compound, known to Jews and Christians as the Temple Mount, in Jerusalem's Old City. Israel's Prime Minister Ariel Sharon told Israeli public radio Oct. 31 that Arafat won't be laid to rest in Jerusalem while he's in power.

French Foreign Minister Michel Barnier said on French television Nov. 7 that Arafat is "alive." Asked if, as reported several days ago, Arafat is brain dead, Barnier said, "I wouldn't say that. His condition is very complex, very serious and stable."

The prospect of Arafat's death "prompts some fears about the equilibrium in his region," said Frederic Panizzuti, senior vice president at MKS Finance, a Swiss precious metals trading and refining company. "We would not be surprised if gold reached new highs over the coming days and weeks."

Some investors buy gold as a hedge against declines in other investments in times of political unrest. Gold futures jumped 4.4 percent on Sept. 14, 2001, as trading resumed following the Sept. 11 terrorist attacks in New York and Washington.

Interest Rates

Some respondents in the survey say gold may fall on concern the Federal Reserve will raise its benchmark interest rate, boosting the value of the dollar and slowing inflation. The Fed will lift its interest-rate target to 2 percent on Nov. 10, according to all 58 economists surveyed by Bloomberg.

After rising to a 15-year high of $433 on April 1, gold fell as the Fed lifted interest rates for the first time in four years from a four-decade low of 1 percent to 1.75 percent since June 30. A futures contract is an agreement to buy or sell a commodity at a specified price and date.

"Gold is due for a breather over the next week," said Adrian Day, president of Annapolis, Maryland-based Global Strategic Management Inc., which manages $85 million. "The Fed may raise rates again."

Speculators' Holdings

Hedge-fund managers and other large speculators reduced their net purchases in Comex gold futures in the week ended Nov. 2 for the first time in seven weeks, the U.S. Commodity Futures Trading Commission said Nov. 5.

Net gold purchases fell to 111,437 contracts, down 13 percent from the previous week of 127,895, which was the highest since April 13, the Washington-based commission said. Speculators amassed 144,253 contracts in early April, the most since at least February 1983.

Trading in gold futures for the year through Nov. 4 reached 12.3 million contracts, surpassing the total for all of 2003, which was 12.2 million, Nymex said in a statement on Nov. 5.

"Gold futures have proven to be a vital investment and trading tool as more and more individuals and firms are seeking alternative instruments," Nymex President James Newsome said in the statement. "This volume record is indicative of the expanding interest both investors and commercial entities are showing in today's commodity markets."

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