Gold At New Record, Rally To Extend To $1,200/Oz

LONDON (Dow Jones)--Spot gold hit yet another record high Monday and market participants struggled to be bearish saying while the rise in gold has been driven largely by momentum buying, there is little to stop gold from rising to $1,200 a troy ounce before the end of the year.

Spot gold is in uncharted territory but its rise to current highs has been accompanied by more periods of weakness than the last time it traded above $1,000/oz. During the previous rise to a high of $1,032.35/oz in March 2008, gold prices nearly doubled over an 18-month period.

This time gold is up only $77 in a similar time frame and dipped and rose more dramatically as commodities across the board were victim to investor liquidation following the collapse of Lehman Brothers.

"We think this rally is sustainable based on dollar weakness, central bank buying and inflation volatility," said Deutsche Bank analyst Michael Lewis. "The target is now $1,200/oz."

As of 1023 GMT, spot gold was trading at $1,108.30/oz, having earlier hit a record high of $1,109.35/oz, which is up 1.4% from Friday's close.Most-active December gold on the Comex division of the New York Mercantile Exchange was at $1,108.80/oz.

Commodities across the board were up spurred by U.S. dollar weakness against the euro and European equities were higher.

Finance ministers from the Group of 20 leading economies pledged to maintain their fiscal stimulus measures at their meeting over the weekend and that weighed on the dollar.

"It looks as if we will have another period where we may see the euro/dollar make new highs for the year," said Mitsubishi analyst Tom Kendall.

Gold is viewed as a good hedge against dollar weakness because it is a physical asset and has a historical relationship with the dollar, having once backed the currency.

Deutsche's Lewis said going back to 1973, December has seasonally been a month of dollar weakness therefore that should continue to push gold up.

On top of the supportive backdrop of a weakening dollar, central banks are set to be net buyers of the precious metal this year after 20 years of being net sellers, said Deutsche's Lewis.

Last week, India's central bank bought 200 metric tons out of a total of 403.3 tons of International Monetary Fund gold earmarked for sale and Sri Lanka's central bank said it has been buying gold to diversify its reserves amid volatile currency markets.

The market is now playing the "guessing game" on who will buy the remainder of IMF's gold, said Kendall. The market expects China, India, Russia, Brazil or Taiwan to be central bank gold buyers.

Large option positions around $1,200/oz could see gold rise to that before the year end but some profit-taking is likely after that, Kendall said.

But gold's rise won't necessarily be in a straight line and exchange traded fund holdings haven't risen substantially, said Standard Bank.

The PHLX Gold & Silver Mining Index has underperformed the marginal gold price. This suggests that equity investors are not convinced of gold's ability to sustain these higher levels in the short to medium term, Standard Bank said.

Goldessential.com also cautioned that the rise could hit a snag because the large number of long positions in the market, or bets that prices will rise, isn't sustainable.

But it said "we acknowledge that the pronounced bull-run has to run its course."