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Gold at nearly 26-year high as Iran optimism fades, U.S. dollar weakens

Last Update: 10:09 AM ET May 9, 2006

SAN FRANCISCO (MarketWatch) -- Gold futures edged closer to $700 an ounce Tuesday to trade at a level not seen since October of 1980 after hopes for resolution over Iran's nuclear program faded and the U.S. dollar weakened, prompting investors to seek refuge among the precious metals.

"Gold ... thrives on uncertainty," said Jon Nadler, an investment products analyst at bullion dealers Kitco.com.

"While one can always mitigate risk to a certain extent (with efficient portfolio hedges), one cannot as successfully hedge for uncertainty and the impacts of same on conventional portfolios," he said. "That is precisely the time when gold shows its long-established attributes best."

Gold for June delivery climbed as high as $693.70 an ounce on the New York Mercantile Exchange, the highest futures level in almost 26 years. The contract was last up $12.60 at $692.50. Prices closed lower for the first time in seven sessions Monday, as traders locked in some of the metal's recent sharp gains.

Gold prices have climbed $29 since the beginning of May alone, propelled higher by a now familiar list of factors, including inflation fears, geopolitical worry, a weaker dollar and burgeoning demand from investment funds seeking better returns than are currently available in other asset classes.

Citigroup believes investors held commodity positions worth more than $120 billion April, with $30 billion in oil and $30 billion in gas. Gold came in third place at $13 billion, while the long position in copper stood at $4 billion, according to Investec Securities.

"As most people have dollar denominated assets, the quest for portfolio preservation is becoming a priority and chasing profits for the sake of pure return is taking a back seat until the skies clear," said Nadler.

Meanwhile, U.S. Secretary of State Condoleezza Rice said a letter from Iranian President Mahmoud Ahmadinejad -- Iran's first communication with the U.S. in 27 years - contained nothing new in the way of proposals that might help break the nuclear stalemate with the West, the Associated Press reported.

While details of the letter have not yet been released, it is understood to criticize Bush for the Iraq invasion and for his handling of the Sept. 11 attacks on the U.S., among other things, AP said.

"Overnight it became clear that, as had been suspected, the written message from Tehran to the White House contained not much more than platitudes and criticisms," said Nadler. "Thus, the U.S. administration is downplaying the episode and its significance, while the U.N. continues to be mired in inaction."

Ministers came away from a meeting of the U.N. Security Council with Russia and China refusing to back the resolution favored by France, the U.S. and the U.K., that would open the door to trade sanctions against Tehran, according to news reports.

Other metals futures headed higher along with gold Tuesday.

July silver futures were last up 31 cents, or 2.3%, at $14.08 an ounce and July copper rose 4.65 cents, or 1.3%, to $3.548 an ounce.

July platinum galloped to a new record at $1,235 an ounce, and was last up $28.10 at $1,230 an ounce, while June palladium rose $13.75 to $389 an ounce ahead of Johnson Matthey's annual review of the platinum and palladium market, scheduled for release on Monday.

On the supply side, gold inventories were down 23,484 troy ounces at 7.63 million as of late Monday, according to Nymex data. Silver supplies rose by 592,836 troy ounces to 124.2 million. Copper fell 326 short tons to 14,876 short tons.

Tracking the metals equities Tuesday, the Amex Gold Bugs Index (HUI :

amex gold bugs index equal-$ weight

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HUI388.92, +12.80, +3.4%) climbed to 382.07 and the Philadelphia Gold and Silver Index (XAU :

phlx gold silver index capital-weight

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11:26am 05/09/2006