Gold Rises to 26-Year High as Funds Buy for Inflation Hedge

May 11 (Bloomberg) -- Gold climbed to a 26-year high in London after the U.S. Federal Reserve signaled concern about rising prices, spurring investors to buy bullion as a hedge against inflation. Platinum advanced to a record.

The Fed yesterday raised the target rate for overnight loans between banks and said higher energy prices and raw material consumption ``have the potential to add to inflation pressures.'' Inflation erodes the value of assets such as bonds, making precious metals more attractive as a hedge. Gold has gained 37 percent this year.

``You can't ignore a doubling and tripling of raw materials prices over a long period of time,'' said Wolfgang Wrzesniok- Rossbach, head of metals trading at Heraeus Holding in Hanau, Germany. ``Inflation is a topic, and it's one of the factors supporting gold prices.''

Gold for immediate delivery rose as much as $5.60, or 0.8 percent, to $713.50 an ounce in London, the highest since it traded at $717 an ounce on Jan. 24, 1980. It traded at $708.98 as of 11:57 a.m. local time.

Bullion has jumped 29 percent since Jan. 9, when Iran resumed nuclear research, spurring investors to buy bullion as a haven and as protection against disruption on other markets, such as currencies, stocks and bonds.

The U.S. and other United Nations security-council members want Iran to stop nuclear research, sparking concern supplies of oil from the world's fourth-largest producer may be disrupted. Oil prices rose to a record last month.

Fund investments in commodities may exceed $120 billion by 2008, up from $80 billion last year, according to Barclays Plc.

Investor Interest

``The major thing about all these commodity prices rising is that there is real long-term investor interest; it's not just speculative buying,'' said Wrzesniok-Rossbach.

Goldman Sachs JBWere Pty raised its gold price estimates yesterday to $675 an ounce for 2006, from $575 an ounce, and expects gold to trade between $630 and $850 an ounce for the rest of the year.

Bullion ``could go all the way to its all-time high of $850 before correcting,'' James Moore, a Kettering, U.K.-based analyst said in an e-mailed report today.

Prices may also gain as production stalls, Wrzesniok- Rossbach said. Western Areas Ltd. said yesterday that output from South Africa's South Deep mine, which extracts gold from the world's largest deposit, will be 50 percent lower than forecast this year because of damage to the main shaft.

``That may have some people worrying about supply going forward,'' said David Thurtell, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. ``There's a lot of reasons to buy gold now, and not much in the other way.''

Platinum Soars

Platinum rose to a record for a fourth day. There's speculation Johnson Matthey Plc., the world's largest distributor of platinum-group metals, will publish a ``bullish'' annual market report, N.M. Rothschild & Sons (Australia) Ltd. said today in an e-mailed report.

Platinum increased $18 to $1,274.50 an ounce. Earlier, it rose as much as $21, or 1.7 percent, to a record $1,277.50 an ounce. It has gained 31 percent this year.

``There's still a lot of industrial demand for platinum,'' Wrzesniok-Rossbach said. The metal is used by jewelers, and the car and petrochemical industries.