Gold earns kudos as alternative to major currencies

The recent broad-based strength of gold, whether measured in US dollars or other major currencies, is a sign that bullion is becoming an alternative currency investment for global investors, analysts say.

In dollar, yen and sterling terms, gold prices rose this week to levels not seen in well over a decade. Meanwhile, gold prices surged to a record high in euro terms.

This trend, which has been unfolding for several weeks, suggests that gold's traditional inverse correlation with the the dollar is no longer as strong as it once was.

Although traders cite speculative buying as one of the immediate causes of gold's strong rally, rising inflation and global investors' fear of these price pressures eroding the value of currencies in general is giving gold a firm boost.

Gold's broad rally "coincides with the inflation story gaining traction ... And I think there's probably a decent speculative component in there too," said David Gilmore, partner at FX Analytics, a consultancy based in Essex, Connecticut.

Until this summer, gold, which is seen as a classic safe haven asset in times of economic and political uncertainty, had a tight inverse relationship to the dollar and positive correlation to the euro.

With gold mainly priced in dollars, a fall in the value of the US currency means it costs more to buy the same amount of gold.

But as the dollar has rallied in recent weeks it hit a two-year high against the yen above 115.00 yen and a three-month high against a basket of currencies on Thursday so has gold.

Spot gold climbed above $480 a troy ounce this week its highest level in 18 years increasing the chances that it will break through the key psychological level of $500 an ounce, some analysts say.

On Wednesday, gold scaled a new record high in euro terms above 401 euros an ounce and rose above £275 per ounce, the highest in about 12 years.

"Clearly there is a momentum towards gold at work. It is flirting with $500 and the indications are it should go through it. That will be a worldwide headline and will attract more buyers," said David Kotok, chairman and chief investment officer of money management firm Cumberland Advisors in Vineland, New Jersey.

"Gold is hoarded by institutions and banks even while they say it has no monetary value, which means they are talking out of both sides of their mouths," Kotok said.

Small increases in global central banks' and other major accounts gold holdings could have a major effect on the relatively small gold market, analysts say.

For example, many of the world's major oil exporters are big gold bugs and as oil prices rise their soaring revenues are likely to magnify demand for the yellow metal.

And as spiking energy prices put upward pressure on global inflation, the precious metal is gaining added attraction as a classic inflation hedge.

But analysts at currency management firm Bridgewater Associates don't believe inflation fears are driving gold's currency-wide rally.

They argue that break-even inflation rates in world bond markets are actually lower now than they were in the first quarter of this year.

"Gold is a thin market that can be disproportionately affected by changes in the investment patterns of one or a few players," they wrote in a note.