Gold soars, dollar slides, investors hedge

Worries about loose money and budget policies around the world sent gold soaring and the U.S. dollar slumping Tuesday, reviving a trend that threatens to reignite inflation for consumers while tarnishing the privileged reserve status of the dollar.

Gold broke through the $1,000-an-ounce barrier for the first time since February as investors piled into the best alternative to the dollar and a classic hedge against inflation. Worries about rising prices were triggered over the long weekend after the Group of 20 finance ministers at a London meeting stressed they are intent on maintaining loose money policies and will not move to lower bloated government deficits until the global economy clearly recovers.

Concern about inflationary policies by Congress and the Federal Reserve have weighed on the U.S. dollar in recent months, provoking talk about abandoning it as the world’s reserve currency. The dollar’s slide accelerated Tuesday after a new United Nations report endorsed moving away from the central role of the dollar in the world monetary system.

“With yet another organization calling for a move away from the U.S. dollar as a global reserve currency, the dollar has come under pressure,” said Adarsh Sinha, currency analyst at Barclays Capital, noting that the U.N. would like to establish a system of managed exchange rates like the European Monetary System in an attempt to stave off future dollar-related financial crises.

“This radical suggestion at present seems far more remote than even the possibility of alternatives to the dollar as the dominant reserve currency,” he said. “A rapid shift by reserve managers away from dollars remains unlikely” as it would be “self-defeating” for central banks from China to Brazil that have invested heavily in U.S. markets and would lose money if the dollar falls further, he said.

“The case for a new reserve system is strong, but the alternatives remain unclear,” he said, and that’s why Barclays expects the dollar to decline only gradually over the next year.

News about the U.N. report and action by the G-20 sent the European currency soaring to $1.4520 from $1.4332 Monday in New York trading, reaching an eight-month high. Gold rose to $1,009.70 an ounce in New York before losing some of its gains to close at $999.80. Gold is within spitting distance of its all-time high of $1,033.90.

“Investors have more money than clear opportunities, and much to worry about” as central banks crank up their money-printing machines and governments splurge on debt, said Martin Hutchinson, analyst with BreakingViews.com, who predicts gold will keep on rising.

“The world’s major central bankers have made it clear that their policies will remain stimulative until doubts about growth have dwindled,” he said. “That commitment leaves some investors worrying about … government over-borrowing and others about monetary stimulation that leads to inflation. All of these worriers might want to take out a little insurance in the form of gold.”

The growing investor demand for gold as an inflation hedge and dollar substitute has the potential to overwhelm the relatively small market for gold as a raw material for making jewelry and other goods, he said. Industrial demand for the precious metal is down more than 20 percent from a year ago, but investor demand has more than offset that with a surge of 46 percent, he said.

“A serious increase in investor interest would cause the gold price to soar,” he said, noting signs that China — perhaps the biggest investor worldwide with $2 trillion in reserves — is moving to put more of its money in gold reserves with the creation of a new gold storage facility near the Hong Kong airport.

While gold is benefiting from inflation fears, not everyone sees the decline in the dollar as a sign of no confidence in the United States.

Tyson Wright, senior foreign exchange trader at Custom House, a Canadian investment firm, said the dollar was favored as a safe haven earlier this year when the global economy was in deep recession. But now the flight to safety is reversing and driving down the dollar, perhaps only until investors realize that the global economic recovery is not yet a certainty.

“At this point the market psyche is to sell dollars when the global outlook is good,” he said. “With the true economic and business data still not very healthy, there is still a lot of risk out there. But … markets will always overshoot, and one cannot simply ignore the trend.”