Gold opens 2007 sharply higher for Dollar investors - 2 January 2007

Gold rose for a sixth session running in Asia today, hitting $638.80 per oz just before Europe began its first trading day of 2007.

Volume so far has been low, with Tokyo and Singapore still closed for the New Year. The sharpest gains have come for Dollar and Yen investors, as Sterling and the Euro have continued to rise on the foreign exchange market.

Both the ECB and Bank of England are expected to raise interest rates again soon, either at their policy meetings next week or early in February. US rates have paid better returns since the summer of '06, but speculators have still driven Euros and Sterling higher in anticipation of Western Europe and the UK raising rates further.

Today the Pound has hit a new 8-year high against the Japanese Yen. By the opening in London, its strength meant the rise in gold had been capped for Sterling investors at £325 per oz.

"Recent talk suggests that inflation might be under control again in the US," says an analyst at Investec in Sydney. "Consequently, that's going to help support gold in the immediate future."

The same error's made by a gold trader speaking to Bloomberg in Seoul. "The decline in the Dollar's value means a rise in gold's value," he said earlier today, mistaking price for value and seeing gold in terms of US Dollars alone.

"Industrial and speculative demand is still tight and the Dollar is weak," he went on. "The Fed raised interest rates for almost 2 years and the US economy is now showing signs of either stabilizing or slowing down."

Tomorrow sees key US manufacturing data for December. The last report showed a contraction in business. Wednesday also sees the US Federal Reserve release the minutes from its December policy meeting.

What can the Fed do to support the Dollar? Does it want to? To read more now, click here...