A massive flight to safety in commodities continued for a second day Thursday as fears mounted in the credit market and the Federal Reserve battled the worst financial crisis since the Great Depression.
Gold tacked on $46.50 Thursday, settling at $897 an ounce on the New York Mercantile Exchange. It jumped as much as $75.50, or 8.8%, to $926 an ounce in intraday trade. But spot prices for gold plunged in late-day trade following reports that Treasury Secretary Henry Paulson might set up a facility to take on bad debts from banks, a move aimed to restore financial system confidence.
The metal had surged 9% to $850.50 Wednesday after the $85 billion federal bailout of the world's largest insurance firm AIG. It was its largest one-day jump in dollar terms since at least 1980.
Until Wednesday's explosion, gold had been trading 23% below its March high of $1,011 an ounce. It bottomed at $740.75 an ounce Sept. 11.
The fact that the gold price fell after the bailouts of Bear Stearns in March and Fannie Mae and Freddie Mac earlier this month but not after AIG "marks an important turn in investor psychology," said Thomas Winmill, manager of $144 million Midas Fund, which specializes in precious metals and natural resources. "You can always save the financial system with a bailout but what's that going to do to the value of the dollar?"
Nothing good. Winmill foresees the greenback depreciating 10% over the next 18 months. Why? Because more bailouts mean more government borrowing. Higher national debt weakens the dollar, especially when the current 5.5% inflation rate eclipses a 2% federal funds rate.
"You'll actually have 3% less purchasing power in a year," Winmill said. "A negative real-interest-rate environment is a very good time for hard asset investing."
SPDR Gold, the largest ETF tracking gold bullion, vaulted as high as 90.78 in midday trade before closing in the red Thursday. It ended down 2.65 at 82.80 on more than 3 1/2 times usual volume. The ETF surged 8.67, or 11.3%, to 85.46 Wednesday in record volume of more than four times average. It's still trading below both its 50- and 200-day moving averages so it hasn't confirmed a strong uptrend.
Companion metal silver jumped $1.025 to $12.70 an ounce on the Nymex Thursday. IShares Silver Trust leapt 8% intraday Thursday before closing down 0.11 at 11.79 in triple average turnover.
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Market Vectors Gold Miners closed down 0.10 to 34 after a volatile session. That followed a 12.3% gain to 34.10, in nearly triple average turnover Wednesday.
SPDR S&P Metals & Mining bounced off a 52-week low to 55.18. It is still deeply below its long-term moving averages and 42% off a high.
The summer correction sent shares of gold companies to extremely oversold levels and they were undervalued relative to bullion, said Joe Foster, portfolio manager of Van Eck International Investors Gold Fund, with $607 million in assets.
"The dollar has been extremely strong and gold has a negative correlation to the dollar," Foster added. "Once that's run its course, you'll see gold get back on track."
A weaker dollar would also put oil back on track. Because oil is sold in dollars, it would take more dollars to buy a barrel. Higher oil would shoot up the cost of producing commodities across the board.
"Gold and other commodities are a diversifying, long-term play on global growth regardless of whether this financial catastrophe turns into a global recession," said Carlton Neel, who manages $1.4 billion as senior vice president and portfolio strategist for Phoenix/Zweig Advisers and Euclid Advisors.
Like with any investment, commodities may underperform should demand slow. But they "will have value regardless of whether currencies debase or companies go bankrupt," Neel said.
Neel has allocated about 25% of assets in his Phoenix Diversifier PHOLIO fund to commodities through ETFs. He's weighted PowerShares DB Commodity Index Tracking Fund at nearly 15% of assets. The ETF holds a basket of futures: light, sweet crude oil, heating oil, aluminum, gold, corn and wheat. It also closed in the lower end of its intraday range Thursday. It ended ahead 0.20 to 33.45.
But the only safe bet in this volatile market is gold, according to John Lansing, a technical analyst and founder of Trending123.com. Overleveraged hedge funds and other investors have piled into commodities and prices will drop steeply as they unwind their positions. Lansing projects gold to hit $1,000 an ounce by the New Year but for oil to plunge to $90 barrel by the end of this month and $65 by Christmas.
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