Gold jumped the most in two weeks on speculation a weaker dollar and higher commodity costs will boost demand for the precious metal as a hedge against inflation. Silver also gained.
The dollar fell for the second time in three days against a basket of six major currencies. The Reuters/Jefferies CRB Index of 19 raw materials climbed as much as 3.2 percent. Gold reached a record in March as the CRB headed to an all-time high in July and the dollar fell to a record against the euro.
"People are getting more concerned about inflation down the road," said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. "If the government keeps on spending and interest rates stay low, it's going to come back and bite us. If the dollar heads lower, that'll be the stimulus gold needs to put together a nice run."
Gold futures for February delivery rose $34.60, or 4.5 percent, to $808.80 an ounce on the Comex division of the New York Mercantile Exchange, the biggest gain since Nov. 21. The price is up 7.5 percent this week.
Silver futures for March delivery climbed 35 cents, or 3.6 percent, to $10.20 an ounce.
"You've got support for gold as the dollar begins to fall," said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago.
Fed-Funds Forecast
The Federal Reserve probably will lower its benchmark lending rate 50 basis points to 0.5 percent on Dec. 16, according to the median estimate of 72 economists surveyed by Bloomberg News. The federal-funds rate was at 5.25 percent in September 2007 before the Fed began slashing borrowing costs.
Gold and most commodities generally move in the opposite direction of the dollar. The U.S. Dollar Index fell as much as 0.8 percent against the basket of currencies. The gauge is still up 11 percent this year, headed for the first annual gain since 2005.
"The dollar can't push any higher now," said Tom Hartmann, a commodity analyst at Altavista Worldwide Trading Inc. in Mission Viejo. "Gold is one of the better-performing commodities this year, but that doesn't mean it has more to gain. Silver is perhaps undervalued."
Gold has dropped 3.5 percent this year, while silver was down 32 percent. Gold climbed to a record $1,033.90 on March 17. Gold's decline is the smallest among 16 commodities in the CRB in 2008. Crude oil and copper are down by more than half. Only cocoa, hogs and sugar have posted gains.
"We're witnessing risk appetite returning, but it's more short-term in nature, instead of an initiation of a long-term uptrend," said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago. "In this environment, where we see Treasury bills at zero, credit markets are the new safe haven, and gold is trading more with riskier assets."
