I have written a number of times in the last few months that gold and mining shares look attractive. While the metal had a big run-up in price during the three-month stretch that ended in late February, the yellow metal has subsequently dropped back a bit, as have the prices of the leading mining shares. If anything, however, the reasons for gold bullishness have intensified.

The U.S. Federal Reserve had been expanding the money supply more rapidly than output for more than a decade, since a policy change in early 1995. That’s why the U.S. economy underwent a series of bubbles, from stocks in 1996-2000 to housing in 2002-2007 to commodities in 2006-2008. Then, when the inevitable crisis hit in September 2008, the Fed began expanding the money supply even more rapidly.

In the six months to March 2, the St. Louis Fed’s measure the St. Louis Fed’s Money of Zero Maturity (MZM), the nearest we can get to the old M3, rose at an annual rate of 16.2%, while the M2 money supply rose at an annual rate of 15.9% (the Fed has stopped reporting the old M3, the best measure of broad money growth). Since price inflation was low during that period and the economy was contracting, almost all that extra money has been pumped straight into the economy.

While the global economy is collapsing, all the extra money will have little inflationary effect. In the United States, however, evidence is building that the economy is approaching the bottom. Consider, for instance, that:

• After several months of decline, the Institute for Supply Management indices were more or less flat in the current month;

• February retail sales – excluding automobiles – were up 0.7%; January non-auto retail sales also being revised upwards to plus 1.6%. We may still have a few months of decline to go, but it seems increasingly likely that the U.S. economy will bottom out around the middle of the year – although the ongoing banking problems and huge budget deficits are virtually certain to prevent a rapid economic rebound. As we’ve said repeatedly, once the economy bottoms out, however, the additional infused capital is likely to serve as a serious inflationary catalyst.

Since September, U.S. Federal Reserve Chairman Ben S. Bernanke has repeatedly warned of the dangers of sustained deflation – and not just a few months of falling prices (which we got in the latter part of last year, thanks chiefly to declining commodity prices), but overall price declines over a prolonged period.

What’s the Market Telling Us?

Recent price statistics make it abundantly clear that deflationary dangers just don’t exist. Both the core consumer price index and the core producer price index were up 0.2% in February, and are well above their levels of February 2008. Notably, one of the major factors was a 1.3% jump in the price of apparel, one import that has been holding prices down for the last decade. In other words, rather than the sustained deflation Bernanke warned about, the latest price figures suggest that we should actually be concerned about inflation, which is clearly starting to accelerate.

Indeed, both the unprecedented budget deficits and the very rapid money supply growth point to an inflation rate of perhaps 10% per annum by the middle of 2010. The latest price-and-output figures suggest that any contrary tendency has disappeared. And that points to a strong likelihood that gold may be due for an additional upward run, which may be quite sharp and happen quite quickly.

The gold market underscored the veracity of my scenario in a very clear fashion yesterday (Thursday): Gold posted its biggest gain in six months after the Fed’s plan to buy debt hammered the U.S. dollar and reignited inflationary fears. Gold futures for April delivery actually jumped $69.70 an ounce, or 7.8%, to reach $958.80.

The yellow metal reached a record high of $1,033.90 an ounce on March 17, 2008 – a year ago this week – when U.S. rate cuts sent the greenback to an all-time low against the euro. Gold prices subsequently declined in concert with most other commodities. It’s up 8.4% so far this year, according to Bloomberg News.

If the hedge funds pile into gold, they will overwhelm the physical gold market, in which 2008’s mine output of 2,407 tons and other supply of 1,061 tons had a value of only about $98 billion at recent prices of approximately $900 per ounce. Gold’s peak price in 1980 of $875 was equivalent to $2,300 in today’s money; it is by no means impossible that the price of gold could soar well beyond that level.

Hedge fund interest in gold was demonstrated Tuesday by the hedge-fund billionaire John A. Paulson, who was probably 2007-2008’s most successful investor, thanks to a strategy to short housing assets that generated profits of more than $10 billion. Now Paulson has gone and bought 11.3% of gold miner AngloGold Ashanti Ltd. (ADR: AU) for $1.28 billion. Paulson’s on a hot streak, so there must be a good chance some of his rich buddies will follow him into the sector; that will inevitably shift the market considerably.

The Yellow Metal Hat Trick: Three Ways to Score From Gold’s Gains

There are three ways to play gold, and you should look at all of them:

• Go for the Gold: Of the three ways to play gold, the first is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (GLD). Today, GLD itself holds more than 1,000 ounces of gold, and has a market capitalization of $31 billion. The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

• Bet that Silver Sizzles: The price of silver generally moves in line with gold, but is currently at around $13.50, below its normal historic relationship to the gold price of about 1:30, and therefore possibly offers more upside potential (in 1980, silver peaked at $50 per ounce, equivalent to about $140 in today’s money.) That can be done through the iShares Silver Trust (SLV), which works in a similar manner to GLD, and which has a market capitalization of $3.5 billion.

• Go Deep: Third, you can follow Paulson and buy gold mining shares. I actually don’t like Paulson’s choice much; AngloGold made a loss in 2008 because of inept hedging and is mainly in South Africa, whose political risk I don’t care for. However, your big advantage over Paulson is that you’re presumably not so rich that you have to deploy your money $1.28 billion at a time. Thus, you can buy on the ordinary share market some of the other mines that are cheaper, rather than having to do a special deal with a company like the Anglo American PLC (ADR: AAUK), the British mining giant that sold Paulson the AngloGold shares from its own stake in that company.

A Look at Two Top Miners

Gold mines had a 2008 that was less profitable than you might expect. The price of gold was essentially flat over the year, while the price of oil soared to a peak in July, affecting miners’ costs badly, since fuel represents 25% or more of a mining firm’s total expenses. Only in the fourth quarter, as fuel prices declined and gold prices rose, did mining economics improve – but, even then, many miners were badly affected by write-offs in their copper operations, where prices had collapsed after a long bull market.

However, the good news is that gold prices have risen by almost 10% in the 2009 first quarter from the final quarter of last year, while fuel prices have declined even more; hence, the quarterly results to be announced in April and May could be surprisingly juicy.

So if you’re going to look at actual miners, here are two to consider carefully:

Barrick Gold Corp. (ABX) is the largest and financially strongest gold producer, with a market capitalization of $29 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa. It took a fourth-quarter charge of $779 million – because of its copper operations – but was otherwise profitable in 2008, with revenue rising 10%. For 2009, it should benefit from rising gold prices and declining costs; it currently sells on a prospective Price/Earnings ratio of 13.7, but of course as gold prices rise, earnings will rise on a leveraged basis.

Yamana Gold Inc. (AUY) is an expanding gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, and that is expanding both production and reserves (currently 19.4m ounces) with operations in Canada and Latin America. Its expansion increases its likely benefit from rising gold prices; Yamana’s shares currently trade at a forward P/E of about 12, but earnings should rise sharply if gold prices rise.

[Editor's Note: When it comes to banking, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson, who brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.

Experiences such as this have imbued Hutchinson with special insights in such areas as banking, the financial markets and fixed-income investing. Just last month, the financial Web site Seeking Alpha named Hutchinson to its "leader board" because of his quickly developing online following. And, in Money Morning, Hutchinson cut through the controversy about the health of the U.S. banking system, analyzed the Top 12 U.S. banks, and told readers which ones were "Zombies" and which ones were "Gems." The article was one Money Morning's most popular pieces of the New Year [If you missed the story, please click here to check it out. The report is free of charge].

Fans and followers of Hutchinson’s work will soon be able to subscribe to a new product that focuses on income investing that will feature more of his – insights and essays. That should debut in about a month or so.

Hutchinson also writes regularly for our monthly newsletter, The Money Map Report, in which he and other Money Morning colleagues also make investment recommendations for subscribers. To find out more about The Money Map Report – including a special offer that includes The New York Times bestseller, “Crash Proof” – please click here.]

News and Related Story Links:

• St. Louis Fed:
  
  Broad Money Measures.

• Money Morning News Analysis:
  
  Inflation Gently Rises in February, Offering Analysts a Sign the Economy Isn’t Collapsing.

• Wikipedia:
  John A. Paulson.

• Money Morning Market Analysis:
  
  Obama’s Stimulus Plan: When is There “Too Much” Stimulus?

• GlobeandMail.com:
  Hedge fund makes headlong rush into gold.

• Money Morning Market Analysis:
  Why Fed Policies and Treasury Department Bailouts Will Lead to Inflation Rather Than Deflation.

Respected Canadian money manager Eric Sprott predicted gold prices will more than double over the next few years as the U.S enters a full-blown depression.

Sprott, who correctly predicted the collapse of banking stocks, made the comments yesterday (Tuesday) during an interview with Bloomberg News.

The United States could be faced with a growing number of financial catastrophes over the next year – culminating with the failure of a U.S. Treasury auction – and gold could soar well over $2,000 an ounce as a result.

Sprott is the chairman and founder of Toronto-based Sprott Asset Management Inc., which manages $4.5 billion. He gained tremendous credibility in the financial world after his call in March 2008 that the world was suffering through a “systemic financial meltdown” that eventually resulted in the collapse of financial institutions including Bear Stearns & Co. and Lehman Brothers Holdings Inc. (OTC: LEHMQ).

Since March 6, when Sprott announced he was buying bullion and shares of gold producers and shorting financial stocks, the Standard & Poor’s 500 Financial Sector Index has dropped 62%. Gold slipped 6.3% during the same period.

Sprott Hedge Fund LP posted a one-year return of 9.9%, Sprott Hedge Fund LP II rose 18% in the period, and the Sprott Canadian Equity Fund dropped 37%, Bloomberg reported.

“The trend is down, and there’s not one signpost that says it’s changing yet,” Sprott said of the U.S. economy. “We’ll stand by to wait to see those, and until it does, you have to assume it gets worse.”

Perhaps the most disturbing aspect of Sprott’s latest assertion is the possibility that a U.S. Treasury auction will fail. That outcome will have a “catastrophic” impact, he said.

As countries pull back funds to quell financial turmoil in their home markets, it reduces funds available for buying U.S. government debt offerings. 

“Each country has their own financial problem, so there’s no funding for anything external,” Sprott said.

Contributing Editor R. Shah Gilani warned in Money Morning last week that the government’s continuing efforts to stimulate the economy with trillions of dollars in bailout funds may eventually ignite a round of inflation.  That could spark a rise in interest rates for all sorts of financial instruments and dampening investors’ appetite for relatively low-yielding U.S. treasuries in the process.

The combination of spiking interest rates that cause a lack of enthusiasm for government debt and dwindling capital investments from foreign investors could result in a failed Treasury auction that would be a disaster for world financial systems.

“If you had some failed government auctions in the developed world, people will realize that even the government can’t get the money that they want to get and that would be very disconcerting to the financial system,” Sprott told the Gold Report earlier this month.

Indeed, demand for treasuries seems to be on the wane. The latest auctions saw yields rise, as investors demand higher rates for their capital. Just this week, interest rates on short-term Treasury bills rose with three-month bills climbing to the highest level since early November, the Associated Press reported.

The Treasury Department sold $29 billion in three-month bills at a discount rate of 0.27% on Monday, up from 0.15% last week. Another $29 billion in six-month bills was auctioned at a discount rate of 0.39%, up from 0.345% last week.

Growing demand for gold as an investment over the last two weeks that has pushed the yellow metal to a four-month high, and is further evidence that investors across the board are slinking more away from U.S. debt.  Indeed, the spot price of gold now hovers above $890 an ounce on the New York Mercantile Exchange, up about 25% from its October lows.

“I believe no matter what environment you’re in – deflation or inflation – people will run to gold,” Strott said. “Gold is proving exactly what we all would have expected, that in almost any environment, it’s a go-to asset.”

News and Related Story Links:

• Bloomberg:
  Sprott Says U.S. Depression Will Boost Gold Price

• Money Morning:
  Obama’s New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble

• Gold Report:
  Eric Sprott: Gold Is the Go-To Asset in Any Environment

• Money Morning:
  2009 Outlook Report on Gold

Having spawned the worst market for stocks since the Great Depression, the global financial crisis is forcing investors to re-examine a number of long-held beliefs. Gold bugs, for instance, have been left to wonder just how gold prices could backpedal in the face of all-time-record demand.

Gold demand did increase – in fact, by a record 45% from the second quarter to the third.

Retail demand was the primary catalyst, spiking 121% to 232 tons. And because of it, bullion dealers reported shortages in bars and coins, according to the World Gold Council, a gold-mining-industry association. 

“Gold’s universal role as a store of value has shone through during this quarter helping attract investors and consumers to all forms of gold ownership,” James E. Burton, chief executive officer of the World Gold Council.

However, if you’d just looked at gold’s performance alone, you’d never be able to tell demand was so strong. Indeed, in the third quarter alone, gold prices tumbled almost 6% – and were actually down as much as 20%, until a mid-September rebound narrowed that loss.

Then came “Black October.”

The worldwide financial crisis continued to punish stocks, slashing the Dow Jones Industrial Average by 14%. At the same time, however, in a disconcerting surprise for gold investors, yellow-metal prices plummeted 17%.

Why? The financial crisis is apparently once again taking long-held market truisms – and forcing investors to question the validity of their beliefs, namely:

• That gold should act as a safe haven against the global recession most economists believe has just begun.

• And that when demand for gold moves up, prices should do the same.

“Gold is not a safe haven against recession,” said Money Morning’s Martin Hutchinson, an investment banker with more than 25 years’ experience on Wall Street and a leading expert on the international financial markets. “It’s a safe haven against inflation.”

And it just so happens that, in October, consumer prices dropped at the fastest rate in the 61 years that the Labor Department has been keeping records.

And as far as gold prices go, demand for gold isn’t as widespread as the World Gold Council would have you think.

Overall demand was a record; that’s no fluke. And most of that came from the retail side. But like common tradable stocks, institutional demand exerts much more influence on the market than consumer-led retail demand.

As markets collapsed, institutions and hedge funds were forced to liquidate assets across the board. This so-called “de-leveraging” is taking place for a number of reasons, but one is due simply to asset allocation issues.

Simply put, institutional investors typically employ an asset-allocation model that’s designed to manage risk and maximize returns by setting a percentage for each category of assets. Those ratios can change over time as some assets surge in value, while others hold steady or even decline. Thus, assets that performed well while others tanked could now comprise 20% of the portfolio’s value, instead of once accounting for 15%.

And these multi-billion-dollar portfolios are often controlled by precise asset allocation guidelines that set strict maximums and minimums for each asset category.

For example, Harvard’s endowment aims to have 13% of its portfolio to be composed of “private equity” investments. But private equity now accounts for more than its assigned allocation. So, to get back to that 13% target, it’s selling $1.5 billion in private equity assets, according to Fortune.

One purpose of such asset-allocation models is to prevent a massive loss in case one class of assets takes a big hit.

But in this case, institutions are selling gold because, in the third quarter, it only fell 6%, while the rest of the stock market skidded 14%.

The logic is confounding, but the bottom line gold’s value is incredibly suppressed considering demand has moved at an all-time high.

Two Catalysts For Gold’s 2009 Climb

The U.S. Department of Agriculture’s Oct. 10 Crop Production Report said acreage for a handful of staple food commodities has shrunk:

• Corn acreage fell 1.2%.
• Soybean acreage dropped 1.4%.
• Canola acreage dropped 1.9%.
• Sunflower acreage shrank 0.8%.
• And acreage of dry edible beans fell 0.7%.

That naturally translates into higher prices because it squeezes the supply of the particular commodity. And it does so at a time when demand continues to escalate from populations in China, India and Latin America.

And higher prices equal inflation.

But Hutchinson – who correctly predicted this last run-up in gold prices – says there’s another catalyst that’s right now inherent in the U.S. economy that could help vault gold prices to $1,500 an ounce by the end of 2009. And it has to do with the much-ballyhooed $700 billion rescue plan.

“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.

The philosophy behind the rescue plan is elegantly simple: By providing a portion of the $700 billion to foundering U.S banks, the Treasury Department believed it could provide banks with badly needed capital, and get them to start lending money once again – jump-starting the economy in the process.

Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Federal Funds target rate nine times – from 5.25% down to the current 1.0% rate – to increase bank-to-bank lending and bank-to-consumer lending.

Right now, banks aren’t boosting lending. Instead, as a Money Morning investigative article demonstrated, they are using the cash – essentially taxpayer-provided money – to finance buyouts of other banks.

Even so, that money will “come out” into the economy in the form of higher stock prices for banks. That will make consumer/investors wealthier, and could make them more confident in the economy. If they’re more confident, they will spend. As that happens, food prices should begin ticking upward, adding another set of thrusters to gold prices.

“Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”

As gold prices increase, count on more investors leaving the sidelines to invest, too, causing the surge in gold prices to accelerate and then steepen.

“As gold goes up, it gets more popular and investors start piling into it,” Hutchinson said.  

And if gold gets anywhere near the $1,500 mark, it will probably be smart to sell. At that level, the price of gold could likely stall and remain in place for a long stretch. Or, in an even more likely scenario, the yellow metal could see its price careen downward – once the economy starts to show some life, forcing the central bank to boost interest rates, an act that should also cause the dollar to rise in value.

[Editor’s Note: Money Morning’s just-published 2009 Gold Outlook report, written by in-house gold expert Mike Caggeso, is part of our just-underway “Outlook 2009” economic forecast series. So far, we’ve published six installments, and have provided outlooks for the stock market, the overall economy, and even the housing market. Many more stories are to come. Next up: Look for our outlook for Latin America and for the U.S. retail market. Like all the reports, the gold report is a must read – whether you’re a true gold bug, or simply an individual investors looking for new ideas in a market that’s already called into question many long-held market maxims.]

News and Related Story Links:

• World Gold Council:
  Record Dollar Demand for Gold as World Looks for Haven from Turmoil

• MarketWatch:
  For gold, a tussle between two groups of investors

• Money Morning Economic Outlook Series 2009 (Part V):
  Five Ways to Play Gold’s Rebound to $1,500 an Ounce.

• Money Morning Special Investigation of the U.S. Credit Crisis (Part VIII):
  How U.S. Missteps Triggered a Spiral of Worldwide Margin Calls and Deepened the Financial Crisis.

• Money Morning Investigative Report:
  Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis.

One of the things people don’t understand about buying gold for diversification is that it doesn’t work all the time.

It works over time.

That means that you can’t simply switch from one asset class to another when the going gets tough and expect miracles. Nor can you expect higher returns.

And that’s the really cruel part.

Many so-called alternative investments, gold being the most notable, are being sold right now on the basis of recent high returns to salivating investors desperate to stop the bleeding in their portfolios.

No question, the yellow metal offers diversification; but near all time highs, its “protection” is debatable at best, when viewed against the harsh light of historical data.

Which is why, at the risk of receiving some very testy email, we have to point out that if you bought gold the last time it was this high, you’d probably regret it now. If you had invested $10,000 in gold in January 1980, the current value of your investment would be $10,600.

Now, compare that to the $279,000 you would have if you had invested that same $10,000 in the S&P 500 Index in January 1980 and you’ll see what I mean.

Does this mean that gold is worthless when it comes to riding out tough markets?

No. Not for a New York minute.

Gold remains a powerful hedge and one that every investor should think about… but for reasons that are not commonly understood.

You see, while gold has never been proven to be a statistically viable inflation protector, it has a significantly correlated 10 to 1 relationship with interest rates and bond prices which, as you know, react to inflation. Therefore, if interest rates rise by 1%, the face value of bonds should fall 10% but gold should rise by 100%.

Which suggests that 10% of the value of a bond ought to be put in gold… as a hedge.

Here’s how such an example would work.

If we allocate $10,000 to this strategy, $9,000 would go into bonds and $1,000 into gold. If rates rise by 1% (as they’re likely to do and then some), the bonds should fall 10% to $8,100 and the gold should rise by approximately 100% to $2,000. Overall, our portfolio would be worth $10,100 (give or take), which is right about where we started.

That suggests a portfolio of bonds and gold is safer than either bonds or gold in isolation.

Story continues below…

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Obviously, gold has been bid up substantially in recent months so the 100% rise we expect based on historical patterns may not be as extreme, nor may it rise another 100% from current levels, but the point remains valid – we don’t buy gold because it hedges bad times.

We buy it because gold protects the income stream we get from our bonds… particularly when the economy is facing severe inflationary pressures like it is now.

So how do we make our move and when?

Everybody has their own preferences for gold investing, including us. There are mining companies, bullion, coins and even jewelry. We prefer the SPDR Gold Trust ETF (GLD). There’s no delivery risk, it’s liquid, and you can buy and sell easily through any online brokerage. Plus, as so many residents who lived through Hurricane Katrina found out, you don’t have to worry about Mother Nature or hooligans stealing it either.

As for when to buy, now is probably a pretty good time. The U.S. Federal Reserve has only just begun to acknowledge the inflationary embers it’s been fanning for a long time. And, as usual, they’re dramatically underestimating the 9%-10% we’re feeling in our pockets. So, even if they don’t officially raise rates, odds are that the markets will anyway as traders cope with rising costs on their own.

Though, as you might suspect, there is a downside.

By taking part of the portfolio that would otherwise be placed in bonds and presumably generating income, this strategy dampens the returns we could potentially achieve with bonds.

But given gold’s protective qualities over time, we think that’s a good bet.

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Spot price of gold eclipsed $935 in trading Monday, its first time above the mark since May 22, as another fresh round of record oil prices exacerbated existing market-wide turmoil.

In light of the Federal Reserve’s decision to hold interest rates at 2.0% – its first rate freeze since September 2007 – many thought the dollar would rebound, and in turn, sweep the legs out from under gold.

But the opposite proved true and gold rallied to its highest price in more than a month.

Story continues below…

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As Money Morning contributing editor Martin Hutchinson recently pointed out, gold remains strong because the leading central banks around the world aren’t curbing inflation the same way, if they even are at all.

The most recent examples are the U.S. Fed and European Central Bank, of which the latter is strongly indicating its intension to raise interest rates at its next meeting. And when it does, it will catapult the euro further ahead of the dollar (despite a U.S. rate freeze) and send investors flocking back to gold.

"During that period, expect speculative demand for gold to intensify and its price to increase steeply," Hutchinson said. "The longer the period before the Fed is forced to increase interest rates, the higher gold will go."

So far, Hutchinson has been proven right. Since before the Fed announced its rate freeze Wednesday, gold has gained more than $55 an ounce, RTT News reported.

Also, gold prices are closely tied to oil prices, which broke records last week and again Monday, trading above $143 a barrel. In recent history, the two have trended on parallel paths.

"If you look at the past 100 years, the gold price was always 10 or 12 times that of oil prices," Moaz Barakat, the managing director of the World Gold Council, told MoneyWeek. "With oil basically around $100 a barrel, gold prices should be at $1,000 or $1,200. That’s the magic relationship between the two."

Profit Plays for Gold

Until the Fed reverses its monetary policy strategy and increases interest rates, gold is one of the best investment bets available in an uncertain economic climate.
Money Morning suggests five gold plays to consider while gold prices are down from their highs:

• The StreetTracks Gold ETF (GLD), which tracks the gold price directly, making it the simplest way to play gold. And with a $17 billion-plus market cap, it has ample liquidity.

• Barrick Gold Corp. (ABX) is a Toronto-based company with mostly North American production, as well as properties in South America and Africa, and some copper and zinc add-ons. It has a $38 billion market capitalization, so there’s plenty of liquidity. By gold-mining standards, this company has a substantial presence, is reasonably valued, and has little political risk. The company also recently sent some very bullish signals to the market and reasserted its confidence in meeting its 2008 output target of up to 8.1 million ounces of gold. [For more details, check out a recent related story about Barrick Gold].

• Yamana Gold Inc. (AUY) is another U.S.-listed/Canada-based company, but this one does its mining in Brazil, Argentina, Chile, Honduras and Nicaragua. Despite its geographic reach, it faces only a medium geopolitical risk. Expect the company to double production to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. 

• Gold Fields Ltd. (GFI) is a South African company that mines in South Africa, Ghana, Australia and Venezuela (where it just sold control to a local company, reducing its exposure to an arguably risky market). It faces a somewhat upper-medium political risk, depending on what you think of South Africa, where the electricity supply to the gold mines is currently unreliable and there’s a good chance of Jacob Zuma winning the presidency in April 2009. Given his record as an anti-Western leftist, and the corruption charges he faces, his potential return can only be viewed as a major negative.

• Kinross Gold Corp. (KGC), another U.S.-listed Canadian company, engages in gold and silver mining, with primary operations in Canada, the United States, Brazil, Chile and Russia. In February, Kinross issued shares to buy a large company with operations in both Brazil and Russia. The political risk is low-medium.

News and Related Story Links:

• Money Morning:
  Cashing in on Commodities: Will Gold Hit $1,500 an Ounce?

• RTT News:
  Gold Prices Add To Recent Rally

Oil and gold each experienced a fresh resurgence yesterday (Thursday) – with crude achieving a new trading record – after the dollar weakened in response to the policy decisions by central banks around the world, and the Organization of Petroleum Exporting Countries’ president said oil may reach $170 by the summer.

Gold jumped 3.7%, trading at a level of $915 an ounce for most of the day, while oil settled at all-time high of $139.64 a barrel, up $5.09, after setting record intraday high of $140.39 – its highest level since reaching a record $139.89 on June 16.

"I foresee prices probably between US$150 and US$170 this summer," OPEC President Chakib Khelil was quoted as telling a French television station. "That will probably decline a bit toward the end of the year."

Also, the head of Libya’s national oil company said the country could cut crude production because the oil market is well supplied, Bloomberg News reported.

Another driving force behind the gains made by oil and gold was the depleted greenback, which tumbled after the U.S. Federal Reserve’s decision to hold its key lending rate steady at 2.0%.

"The Fed said that inflation is a major concern, but they’re not going to do anything about it, which made gold go ballistic," Leonard Kaplan, the president of Prospector Asset Management, told Bloomberg News. "The dollar is going to get slammed again."

After meeting Wednesday, the policymaking Federal Open Market Committee (FOMC) acknowledged that inflation as a growing problem, but also expressed its belief that an economic downturn would eventually blunt demand for goods and drive down prices.

"The committee expects inflation to moderate later this year and next year," the FOMC said in a statement.

While the Fed is content to sit back and measure the stimulative effect of its previously mandated rate cuts, Jean-Claude Trichet, chairman of the European Central Bank, is telegraphing a rate hike that will do even more damage to the U.S. dollar.

The greenback, which fell to $1.5758 against the euro in afternoon trading, will likely sink further after the central bank’s Governing Council meets July 3, as the body is largely expected to raise its interest rate a quarter of a point to 4.25%.

"The Governing Council remains particularly concerned that current elevated inflation rates, which have proved higher than and more persistent than previously foreseen, may become entrenched in private inflation expectations and lead to second-round effects," Trichet told an economic committee of the European Parliament.

Even a minute ECB rate increase will significantly widen the gap between the euro and the dollar, and will further elevate commodity prices.  Oil, was up more than $4, or 3%, by midday, trading at $138 a barrel.

One of the many investors to voice concern over mounting inflationary pressures is Warren Buffett chairman of Omaha-based Berhshire Hathaway Inc. (BRK.A, BRK.B). 

"I think inflation is really picking up," Buffett told CNBC earlier this week. "We see it everyplace.  It’s exploding."

Of course, many analysts believe the situation is out of Fed Chairman Ben S. Bernanke’s hands at this point, contending that if he does raise rates to combat inflation, he will forfeit what little economic growth remains to be seen in the U.S. economy.

"In an environment of dislocated funding markets, a rate cut would not produce a recovery buy a rate hike could trigger recession," wrote Tullett Prebon economist Lena Komileva.

Indeed, Money Morning Investment Director Keith Fitz-Gerald said that institutional traders are at the flight controls of market prices right now – not the Fed.

"Every time the Fed goes up against institutional traders, the Fed loses," Fitz-Gerald said.

News and Related Story Links:

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• Fortune:
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• Money Morning:
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• Bloomberg:
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• International Herald Tribune:
  OPEC president: Oil prices could hit $170 a barrel this summer

By Peter D. Schiff
Guest Columnist

As the price of gold has taken some lumps since it crashed back down through the psychologically significant $1,000-per-ounce mark back in March, those on Wall Street who had consistently underplayed its potential on its way up are now assuring its continued retreat.

According to these gold market spectators, prices have risen solely as a result of financial panic, and now that the fear has apparently subsided, the gold-price gains will evaporate as well.

I have been buying gold and gold stocks for myself – and for my clients – since 1999, and not once did I buy out of fear.  In fact, from my perspective, the only fear I’ve observed in the gold market is from those who have been too afraid to buy.

Fundamentals vs. the “Fear Factor”

While fear may from time to time play a role in creating price spikes in gold, the underlying bull market has been driven by solid fundamentals. Those who have been too afraid to buy simply do not understand the underlying dynamics and have instead decided that the market is irrational. As a result, gold continues to climb the classic wall of worry as any dip in its otherwise upward trajectory causes the speculative investors to jump ship. And that typically turns out to be a big mistake.

Take Friday’s trading action, for example. Gold for August delivery jumped $23.50 an ounce to close at $899 on the New York Mercantile Exchange (NMX) – the yellow metal’s strongest close since May 28. That means the price of gold was up 2.7% for the day.

Gold’s ascent from less than $300 an ounce to its current level was – and is – being driven by those who prefer the yellow metal as a store of value over the paper alternatives offered by governments [Check out Money Morning's latest report on gold investments, published Friday as part of our ongoing "Cashing in on Commodities" series. The report - "Is Gold Headed for $1,500 an Ounce?" - is free of charge].

As the U.S. Federal Reserve’s dollar-debasement policy kicks into high gear – and other central banks around the world are forced to follow suit to maintain their pegs against the dollar – the rational choice for long-term investors is gold. Thus, the decision to buy is not rooted in fear, but rather in reason.  On the other hand, the decision not to buy is not only rooted in fear, but in ignorance, as well.

Jumbo Shrimp … and Government Accounting

Those oblivious to gold’s warnings instead place their trust in government-supplied statistics.  Based simply on flimsy consumer price index (CPI) reports, these observers believe that inflation is nowhere in evidence, and that the flight to gold is therefore unwarranted. 

The government’s recent gross domestic product (GDP) report provides the latest illustration of this dynamic.  Federal number-crunches were able to present an annualized, first-quarter growth rate of 0.9% based on an assumed annualized rate of inflation of only 2.6%.  In other words, inflation in the first quarter of 2008 was the lowest for any first quarter in the last four years.  How such a claim did not elicit howls of laughter is beyond me.  The government previously reported that in the years 2007, 2006, and 2005, annualized first quarter inflation rates were 4.2%, 3.4% and 3.9%, respectively.

With global commodities prices climbing steeply, does anyone – besides some of the Fed governors and most Wall Street economists – really believe that inflation so far this year is really 33% below the average rate over the past three years?

Many of those who place their faith with government figures and dismiss the movements in gold believe that inflation is not a problem so long as wages are not rising rapidly.  The fact that U.S. wages aren’t rising anywhere near as fast as overall prices here merely means that wages are rising – but just not in America. Wages are rising in the nations that produce the goods that we consume, and those higher costs are indeed being passed on to Americans.

However, recent action in the bond market suggests that a few more people are getting wise to the government’s con.  A little over a week ago, yields on long-term Treasuries hit new highs for the year, with the yield on the 10-year treasury up 90 basis points from its March nadir.

While the Pollyannas on Wall Street attribute this move to the strengthening U.S. economy, those of us buying gold know it’s more likely a long overdue increase in inflation expectations. 

Got gold?

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[Editor's Note: For a related news story on Friday's record surge in crude-oil prices - including several profit plays to consider - please click here. For a more-detailed analysis of the nation's financial problems, and the inherent dangers that these problems pose for both the U.S. economy and for dollar-denominated investments, download Peter Schiff's new financial-research report: "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities." That report is free of charge.]

News and Related Story Links:

• Money Morning Financial Commentary:
  That Pain You Feel at the Pump is From a Dollar Crisis, Not an Oil Crisis.

• Euro Pacific Capital Inc. Special Research Report:
  The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities.

• Money Morning Commodities Investing Series:
  
  Cashing in on Commodities: Will Gold Hit $1,500 an Ounce?

• MarketWatch.com:
  
  Gold gains over $23 to end the week higher; Prices see biggest rise since Feb. with dollar down, oil up.

• Money Morning Commodities Investing Series:
  Cashing in on Commodities: What’s Driving the Oil Bull, How Much Further It Will Go, and How Investors Can Profit.

• Money Morning Special Investment Report:
  Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China.

• Money Morning News: U.S. Economy Expanded Faster than Reported, With First Quarter GDP Revised Upward to 0.9%.

By Mike Caggeso
Associate Editor

Gold prices have skidded about 15% since the "yellow metal" hit an all-time record of $1,032 an ounce on St. Patrick’s Day.

The retreat has most certainly caused "gold bugs" considerable angst. But they can relax.

This "retreat" is only temporary.

Indeed, gold could easily spike above the $1,500 level this year, says Money Morning Contributing Editor Martin Hutchinson. After all, worldwide monetary policy, global supply-and-demand, and expectations built up from past performances already have combined to ignite the earlier rally that took gold to its record levels just a few short months ago.

Many of those factors remain in place.

And now, three additional catalysts are ready to power gold prices to even greater record levels. Those new catalysts are:

• Inflation.
• Oil prices.
• Fatter wallets in emerging markets.

Inflation and Gold

Global inflation will be a key – if not the key – factor because of gold’s established reputation as an inflation hedge.

Since September, the U.S. Federal Reserve has lowered interest rates seven times – chiefly because of a subprime-mortgage mess that grew into a global financial crisis.

Many foreign central banks have either reduced interest rates in kind, or opted to stand pat, even though inflationary forces in their own markets actually dictated that a rate increase might be a wiser move.

Low worldwide interest rates – arguably an artificial situation, of sorts – has stoked global inflation and caused the greenback to plunge to record lows against other major currencies. And the weak greenback has been a key catalyst behind the escalation of oil prices.

As Money Morning’s Hutchinson has predicted, however, the Fed and other central banks will eventually be forced to start pushing interest rates higher – a stance that even Fed governors are starting to support.

"And during that period, expect speculative demand for gold to intensify and its price to increase steeply," Hutchinson said. "The longer the period before the Fed is forced to increase interest rates, the higher gold will go."

"Black Gold" and Gold

There is a very tight correlation between rising oil prices and rising gold prices. While the torrid oil-price advance may moderate at some point – no market goes straight up or down without interruption – the trend in the crude-oil market clearly is toward higher prices, MoneyWeek reported.

And high oil prices tend to support gold prices.

Referring to the "magic relationship" between oil and gold, Moaz Barakat, the managing director of the World Gold Council, said the fluctuations were natural and in accordance with historic price adjustments.

"If you look at the past 100 years, the gold price was always 10 or 12 times that of oil prices," Barakat told MoneyWeek. "With oil basically around $100 a barrel, gold prices should be at $1,000 or $1,200. That’s the magic relationship between the two."

[Editor's Note: Gold investors have made a killing in the past few years, and gold's meteoric rise is hardly over. Money Morning contributing editor Martin Hutchinson has predicted the precious metal could climb as high as $1,500 in the near future. For additional profit plays on gold - as well as oil, the U.S. dollar, sovereign wealth funds, emerging markets, agriculture, uranium, biotech and much more - check out Money Morning's just-published global investing guide, The Essential Investors Playbook. It's Money Morning's first foray into the investment-book market, but we're certain you'll find it worthwhile.]

Asian Wealth

Naturally, as per capita wealth increases in such emerging markets as China, India and Latin America, demand for "American" goods will soar. That holds true both for American "brands," as well as for so-called "lifestyle goods" – products that foreign consumers identify as being part and parcel of the "American" way of life. Jewelry, gold, gems, other precious metals all will benefit from the growing ability of the newly forming middle classes to spend on wares that aren’t just necessities.

That’s different from past bull markets for gold, which were solely inflation-driven; that is, investors who were seeking to hedge their bets against rising prices caused gold prices to skyrocket.

To be sure, inflation has been a big factor this time around. Gold prices usually move in the opposite direction of the U.S. dollar. With the dollar weak, and interest rates low, an up-tick in inflation could send gold prices higher.

But for gold prices to really zoom, consumer demand will have to act as an adjunct to inflation. And rising demand from increasingly wealthy consumers in China and India may be just the ticket.

Now that the Internet and satellite TV have allowed these aspiring consumers to see what kinds of wares U.S. consumers regularly have, this new group of Asian consumers also want their own houses, cars, appliances, cell phones, computers and jewelry. They are willing to work to get it. And they are all-too-happy to pay the rising asking price.

The upshot: The wealthier this new group of consumers becomes, the more they’ll envy these goods – and the higher the price tags on those products will climb.

This new source of demand could potentially blunt gold’s run toward $1,500. Naturally, demand drives up prices. And, recently, steep prices are to blame for the 11% decline in gold sales during the Hindu holiday of Akshaya Tritiya, where long-term investments such as gold, silver and real estate are religiously merited as purveyors of prosperity.

Like Christmas, Hindus are constantly reminded of Akshaya Tritiya by a bevy of special sales and advertisements from jewelers and real estate companies. 

This is important to note because Hindus were curbing the religious tradition of buying gold, which sheds light on "how much is too much?"

Profit Plays for Gold

Nevertheless, until the Fed reverses its monetary policy strategy and increases interest rates, gold is one of the best investment bets available in an uncertain economic climate.
Money Morning suggests six gold plays to consider while gold prices are down from their highs:

• The StreetTracks Gold ETF (GLD), which tracks the gold price directly, making it the simplest way to play gold. And with a $17 billion-plus market cap, it has ample liquidity.

• Barrick Gold Corp. (ABX) is a Toronto-based company with mostly North American production, as well as properties in South America and Africa, and some copper and zinc add-ons. It has a $38 billion market capitalization, so there’s plenty of liquidity. It has a trailing Price/Earnings ratio of 19.27 and a forward P/E of 15.11. By gold-mining standards, this company has a substantial presence, is reasonably valued, and has little political risk. The company also recently sent some very bullish signals to the market and reasserted its confidence in meeting its 2008 output target of up to 8.1 million ounces of gold. [For more details, check out a recent related story about Barrick Gold].

• Yamana Gold Inc. (AUY) is another U.S.-listed/Canada-based company, but this one does its mining in Brazil, Argentina, Chile, Honduras and Nicaragua. It has a market cap of $9.7 billion and a trailing P/E of 39.17, but its forward P/E is only 13.91. Despite its geographic reach, it faces only a medium geopolitical risk. Expect the company to double production to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. 

• Gold Fields Ltd. (GFI) is a South African company that mines in South Africa, Ghana, Australia and Venezuela (where it just sold control to a local company, reducing its exposure to an arguably risky market). The company’s market cap is $9 billion, its trailing P/E is 16.33, and its forward P/E is 10.12. It faces a somewhat upper-medium political risk, depending on what you think of South Africa, where the electricity supply to the gold mines is currently unreliable and there’s a good chance of Jacob Zuma winning the presidency in April 2009. Given his record as an anti-Western leftist, and the corruption charges he faces, his potential return can only be viewed as a major negative.

• Kinross Gold Corp. (KGC), another U.S.-listed Canadian company, engages in gold and silver mining, with primary operations in Canada, the United States, Brazil, Chile and Russia. In February, Kinross issued shares to buy a large company with operations in both Brazil and Russia. The political risk is low-medium. It has a market cap of $14 billion, a trailing P/E of 33.37, and a forward P/E of 16.99. It looks somewhat expensive. 

• Royal Gold Inc. (RGLD) is a U.S.-based company with mines in Nevada, Mexico and Argentina. It faces low political risk. But with a market cap of $905 million, a trailing P/E of 46.24, and a forward P/E of 26.35, the stock looks expensive.

[Editor's Notes: In Money Morning's "Cashing in on Commodities" series we have written about uranium and coal, crude oil, timber, frontier markets and luxury commodities. While oil and other commodities have dominated the headlines, they're far from the only investment opportunities available. And some of the other profit plays are more lucrative, and less risky. If the economic uncertainty - or the volatile markets - of recent months have you at a loss over the best moves to make next, check out Money Morning's first book, "The Essential Investor's Playbook for the Next 12 Months." At 118 pages, our just-published global-investing guide provides an insider's look at the Top 16 global trends you're likely to face over the next year or more, and contains a special chart that details more than 50 profit opportunities. And it really is a playbook: No matter what the market throws at you, you'll find a play you can call to maximize profits.]

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Oil soared to yet another record high on Friday after Goldman Sachs Group Inc. (GS) raised its price forecast for the second half of the year. However, during a visit with Saudi Arabia’s King Abdullah U.S. President George W. Bush was able to convince the world’s leading oil exporter to increase its output.

Light sweet crude for June delivery jumped $3.31 a barrel, or 2.7%, to reach $127.43 in electronic trading on the New York Mercantile Exchange. Oil prices have now soared 103% in the past 12 months. 

The jump was largely attributable to a new prediction from investment-banking giant Goldman Sachs, which raised its price forecast for the second half of the year to $141 a barrel. Goldman Sachs analysts had previously quoted a price of $107 a barrel.

"Supply constraints continue to push crude prices higher," Goldman analysts wrote in a research note Friday. "The dire macroeconomic impact from the current oil shock has yet to materialize."  

This is the second time in as many weeks that a Goldman Sachs oil-price prediction has ignited a trading tempest in the crude-oil markets. Goldman Sachs, JP Morgan Chase & Co. (JPM) and CIBC World Markets Inc. each recently put forth scenarios that have oil surging over $200 a barrel in the next two years, as soaring gas prices and wary U.S. consumers have failed to put a significant dent in oil demand.

In their report, CIBC analysts actually predicted that gasoline would reach $7 a gallon within four years as oil prices surged to $200 a barrel.

However, Money Morning Investment Director Keith Fitz-Gerald – a longtime energy bull – has actually gone a step further suggesting prices will spike as high as $225 a barrel.
          
That projection represents a revision from a market call he made in December, when crude prices were in the $90-a-barrel range: At that time, Fitz-Gerald caused a stir when he predicted that oil prices were headed for $187 a barrel. He reiterated that prediction back in early March – just before the investment-banking crowd started making their hefty forecasts for oil and gasoline.

"The math is really simple here," Fitz-Gerald said in an e-mail interview from China, where he was heading an investment-research tour. "We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises] … perhaps a terrorist event …and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices. That’s already in the oven."

In addition to the proprietary strategy he uses to project market prices, Fitz-Gerald said he relied on some of the observations he’s been making as part of the investor trip he’s leading through China.

After all, with all the bustle and development taking place in that country, all it takes is for one to stroll down the street to see that the demand for oil and gasoline is going to increase far faster than most analysts would ever believe.

"Nowhere is that more evident than China where I’m traveling now," Fitz-Gerald said last week in an e-mail from Mainland China’s capital. "Beijing alone is adding 14,000 vehicles a day (1,500 of which are just cars). Across China, the number is obviously higher. [The] same [is true] in India, but I don’t have the figures at my fingertips. Then there’s the other side … evidence suggests that OPEC reserve figures may be artificially high. Imagine what’s going to happen when people figure out that there really isn’t as much oil as everybody thinks. $225.21 is not out of the question … after we get to $187."

Famed investor Jim Rogers shares Fitz-Gerald’s belief that the Organization of Petroleum Exporting Countries (OPEC) may be guilty of some subterfuge in reporting its reserves.
"Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve," Rogers recently told Money Morning during an exclusive interview in Singapore, where he now makes his home.  "It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.
"If you go to Saudi Arabia you have to wonder: ‘How could this be?  How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?’  The Saudis say: ‘You either believe us or you don’t."And that’s the end of the conversation."

Saudi Arabia Changes Its Tune

OPEC nations have routinely resisted calls to increase output, insisting that investor speculation has hijacked the market and high oil prices have nothing to do with demand, which they see declining as the U.S. economy continues to slow. OPEC, which pumps more than 40% of the world’s oil, has kept output targets unchanged during its past three meetings, on March 5, Feb. 1, and Dec. 5.

In fact, in its Monthly Oil Market Report for May, the cartel said global demand for oil would grow at a significantly slower rate than previously forecast. World oil demand will rise by 1.16 million barrels per day (bpd) – 40,000 barrels per day less than previously predicted.

However, OPEC analysts also acknowledged that non-member nations would produce less oil than originally thought, and after President Bush met with King Abdullah Friday, there was a sudden reversal of fortune.

Late Friday, Saudi Oil Minister Ali al- Naimi said the country would raise output by 300,000 barrels a day to 9.45 million barrels a day in June, Bloomberg Newsreported.

"On May 10 we increased our response to our customers by 300,000 barrels because they asked for it," al-Naimi said. "So our production for June will be 9.45 million barrels per day. This is the request of about 50 customers worldwide."

In its monthly report, OPEC said its production fell by about 390,000 barrels a day in April, mostly due to violence in Nigeria. The same report said Saudi Arabia’s April production was 9.02 million barrels a day, down 37,000 barrels a day from a month earlier.

The increase comes as gas prices climbed to historic highs, drawing the ire of many U.S. politicians. It so happens that Saudi Arabia has a number of deals on the docket with the United States that risk interference should high oil prices persist.

Last week, Senate Democrats introduced legislation to stop a scheduled arms sale to Saudi Arabia unless the country opened its valves a little wider.

"When the President meets with King Abdullah Friday, we cannot settle for a smile, or a handshake, or even a glimpse into his soul," Senator Charles Schumer of New York said. "We need a commitment to pump more oil. If Saudi Arabia and other OPEC countries do not substantially increase production, we in Congress will block their lucrative arms deals."

It was also announced Friday that to help protect Saudi Arabia’s oil and it will help the world’s top crude exporter to develop peaceful nuclear energy. 

"The United States and Saudi Arabia have agreed to cooperate in safeguarding the kingdom’s energy resources by protecting key infrastructure, enhancing Saudi border security, and meeting Saudi Arabia’s expanding energy needs in an environmentally responsible manner," a White House statement said.

According to Reuters, the United States and Saudi Arabia will sign a memorandum of understanding to cooperate on a peaceful nuclear program.

"This agreement will pave the way for Saudi Arabia’s access to safe, reliable fuel sources for energy reactors and demonstrate Saudi leadership as a positive non-proliferation model for the region," the White House statement said.

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• Wikipedia:
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• International Herald Tribune:
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• Reuters:
  U.S. says to help Saudi protect its oil

Gold futures closed at $899.90 an ounce Friday, the highest level in close to a month, gaining 1.6% on the week as lackluster economic data increased the precious metal’s appeal as an inflation hedge. Gold for June delivery hit an intraday high of $904.50 on the New York Mercantile Exchange.

Gold futures finished strong last week climbing $13.50 Thursday and $19.90 Friday – a 4% jump in just two days.

"Gold surged initially on technical buying and short covering prior to weak economic data in the form of Empire and Philly Federal Reserve indices, industrial production, weekly jobless claims and the [Treasury International Capital System] data – all of which were neutral to negative, which exacerbated the move to the upside," Mark O’Byrne, a director at Gold and Silver Investments Ltd. told MarketWatch.

The Treasury Department’s monthly TICS capital flow data showed net overall capital flows reversed "sharply" in the month of March to an outflow of $48.2 billion, after reflecting a 448.9 billion inflow the month prior, O’Byrne said.

The shift was "dollar bearish and gold bullish," he added.

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The Labor Department also reported last Thursday that the number of U.S. workers filing for initial jobless benefits increased slightly more than expected in the week ended May 10. First-time jobless claims rose to 371,000, up from 365,000 for the week prior. Economists surveyed by Reuters had forecast the number of new claims at 370,000. And the U.S. Federal Reserve reported industrial output fell by 0.7% in April.

That data was followed Friday by news that consumer sentiment was at a 28-year low. The U.S. consumer sentiment index, which is published by the University of Michigan and Reuters News Agency, fell to 59.5 in April, from 62.6 in March.

Gold’s price increase was accompanied by similar jumps in silver and platinum. July silver futures jumped 28 cents (1.7%) to close at $16.96 per ounce and July platinum futures rose $55.10 (2.6%) to close at $2,132 per ounce. 

Oil also climbed to a record high $127.43 a barrel Friday, highlighting an investment-shift into commodities, as the U.S. economy continues to send mix signals.

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