Gold Rises to 26-Year High on Hedging Against Weaker Dollar

May 12 (Bloomberg) -- Gold rose to a 26-year high in London as the dollar fell against the euro, prompting investors to buy the metal as a hedge against further declines. Platinum rose to a record for a fifth consecutive day.

The dollar fell to the lowest in a year against the euro on concern a U.S. government report will show the nation's trade deficit in March widened to the third-largest ever. Gold has risen 41 percent this year while the dollar has declined 8.4 percent against the euro.

``Expectations of further declines in the dollar have been extremely supportive of the gold price in the past two weeks,'' Yingxi Yu, a London-based precious-metal analyst at Barclays Capital, said in an interview. ``There seems to be little sign of a reversal in the market.''

Gold for immediate delivery in London rose as much as $16.10, or 2.3 percent, to $730.40 an ounce, the highest since January 1980. It traded at $729.38 as of 12:28 p.m. local time and is up 6.7 percent this week, its ninth consecutive weekly gain.

Against the euro, the dollar dropped 0.4 percent to $1.2916.

``Gold typically benefits from a weaker U.S. dollar,'' Gavin Wendt, senior resources analyst with Fat Prophets Funds Management in Sydney, said by phone. ``It seems that the other precious metals, silver and platinum, are enjoying that same relationship now.''

Bullion has also surged this year as investors bought the metal as a hedge against inflation, Yu said. Oil prices reached records this year due as a dispute over Iran's nuclear program sparked concern supplies from the world's fourth-largest oil producer may be disrupted.

Inflation Pressures

The U.S. Federal Reserve on May 10 warned higher energy costs and raw-material consumption ``have the potential to add to inflation pressures.'' Surging consumer prices erode the value of assets such as bonds, making precious metals more attractive. Gold has surged almost 73 percent in the past year. Silver has more than doubled while platinum has jumped almost 54 percent.

Gold may surpass $850 an ounce this year, Yu forecast. ``It's a distinct possibility. See how gold has gone from $600 to above $700 in less than a month.''

By the end of 2007 bullion may surpass $850 as oil climbs to $100 a barrel, said Quinton George, managing director of Cape Town-based Trinity Holdings Ltd., South Africa's second-largest gold fund.

Platinum Demand

JPMorgan Chase & Co today raised its gold price forecasts, citing inflation. The bank raised it forecast average gold price for the third quarter of this year by 22 percent to $700 an ounce.

Platinum for immediate delivery rose $42.50 to $1,338 an ounce. Earlier it gained as much as $44.50, or 3.4 percent, to a record $1,340.

``Looking at where the platinum price is, cracking that psychological barrier of $1,300 removes an impediment for a lot of traders,'' Wendt said. ``There's tremendous demand for platinum, not only in the jewelry market, but also for motor vehicles.''

Platinum, which is used to make jewelry as well as auto catalysts, may rise further as the June wedding season approaches in Asia, Wendt said. Demand for cars in countries such as China is pushing up sales for car exhausts containing platinum, as environmental regulations become stricter.