St. LOUIS () -- Spot gold surged to a new 2007 high today on the back of a weaker U.S. dollar as traders worried about the impact of high oil prices on the economy. Analysts say the yellow metal's safe-haven attributes may have officially kicked in with further strength on the horizon.
James Moore, metals analyst for TheBullionDesk.com, said in an e-mailed note that "gold does seem to have found some momentum of its own this week, suggesting the metal's safe-haven attributes have well and truly kicked in."
"Clearance of $684.50 would be a bullish signal and should open the way to test $692 and ultimately $700," he said, adding that chart resistance at $684.50 is the down-trend-line dating back to last May when the metal hit $732.
New York bullion moved as high as $698.80 per ounce at mid-day before closing at $694.50 spot bid, adding $13.60 for the day. Gold futures for December delivery rose $13.90 to close at $704.60 an ounce on the New York Mercantile Exchange, after touching $707 during the day.
David Beahm, Vice President of Marketing and Economic Research at Blanchard and Company, said gold is once again showing its traditional appeal as a safe-haven investment when the economy is otherwise weak.
He said the subprime market crunch caused institutional investors to sell all assets - including gold - from mid-July to mid-August to raise cash to cover margin calls. Now it appears that investors are getting back into the gold market based on traditional fundamentals.
"The current weak economic conditions, paired with the fact that September and October traditionally have been the strongest months in terms of investor demand, has gold nicely positioned for a run past $700 an ounce in short order," he said.
Jon Nadler, analyst at Kitco Bullion Dealers, attributed gold's latest move to "fresh trend-followers" adding new positions, some short-covering and some safe-haven buying.
"Maintaining this levels for several days' worth of settlements could draw additional hibernating investors out of their shells, possibly offsetting those who will be increasingly tempted to cash out after they benefited from the best gains in months," he said.
Mark O'Byrne, director at Gold and Silver Investments Ltd., in e-mailed comments reiterated that gold is being supported by a weaker dollar with signs of a slowing U.S. economy.
The dollar weakened against European currencies after the European Central Bank decided to hold its key interest rate steady at 4%. The euro rose to $1.3697, up from $1.3660 yesterday. The Dollar Index edged down 0.2% at 80.495.
"The continuing uncertainty in the financial markets is likely to be leading to an increase in safe haven buying as well," added O'Byrne.
O'Byrne also noted that gold lease rates have increased significantly in recent months (see LMBA statistics).
"Bullion banks are seeking higher rates of return on the bullion they lease out and this is a further sign of robust physical demand," he said. "This is important to keep an eye on."
Ross Norman, Director of TheBullionDesk.com, further emphasised the change over the last month in borrowing rates in an article today. He said this tells a story of a shift that is occurring in the bullion market.
The cost of borrowing gold for 12 months has been around 20 basis points plus a margin for most of 2007. However, the underlying cost of borrowing has more than doubled to 45 basis points, following subprime lending concerns.
"In summary, banks have tightened credit and all forms of lending, including gold leases, have become more expensive," said Norman.
Strengthening oil prices have also bolstered gold, as crude continues its path towards all time record highs of $78.77.
October crude climbed 57 cents to close at $76.30 a barrel Thursday, marking its strongest closing level since early August. The contract touched $77.23 ahead of the release of supply data.
According to the Energy Department, crude supplies dropped by a bigger-than-expected 3.9 million barrels to 329.7 million during the week ended Aug. 31. Gasoline supplies also fell by 1.5 million barrels in the latest week to a total of 191.1 million.
Meanwhile, Syria said Thursday that it opened fire on Israeli aircraft that violated Syrian airspace. Syrian officials said the defences forced the jets to drop ammunition over deserted areas and turn back. Israel's military said it would not comment on the reports.
"Many analysts have ignored oil's recent and continuing strength, and this is another important and fundamental factor supporting gold," said O'Byrne.
The current gold to oil ratio sits at around 9.1 barrels to gold ounce. However, this ratio has been falling in 2007 with oil prices increasing at a faster rate than gold. Oil has gained about 6% in one month, 16% in 3 months and 24% in 6 months, while gold has added only 3%, 4% and 5%, respectively.
Last year, the gold to oil ratio averaged about 9.2 bbl/oz, hitting lows of 8 in June 2006. This year, the ratio has averaged 10.29 bbl/oz, hitting a multi-year high of 12.53 bbl/oz on . However, the ratio dropped below 9 bbl/oz in and hit a yearly low of 8.5 in late July.
With the 36-year average at about 17.5 bbl/oz, followers of this correlation see gold moving much higher.
Dennis Gartman, editor of the Gartman Letter, a long-time trader of this correlation, remains long of four units of gold and short four units of crude oil. He vows to sit tight with this position, "as we have for years."
"Gold's trend is up; trade then accordingly, erring upon the side of owning gold relative to most any other major asset class," he said in the Sept. 5 Letter.