CNNMoney.com
Gold continues its strong run
Thursday January 31, 3:58 pm ET
By David Goldman, CNNMoney.com staff writer


Gold prices continued to skyrocket Thursday on the falling U.S. dollar, supply concerns and high world-wide demand.

At the market's close Thursday, gold for April delivery traded at $928 an ounce, up from the previous record close on the New York Mercantile Exchange of $926.30 set Wednesday.

Gold for April delivery is currently trading at the highest volume at the exchange. February contracts for gold - the nearest traded contracts - settled at $922.70 an ounce, and March contracts closed at $925.70.

The commodity soared Wednesday as the Federal Reserve cut its key interest rate for the second time in just over a week. Lower interest rates stimulate the economy, but they can also weaken the dollar. With inflation on the rise amid a slumping stock market, many investors have turned to gold as a safety net, sending the price of gold soaring.

"We have seen a lot of momentum trading recently," said Jon Nadler, an analyst with Kitco. "There was a bit of a knee-jerk reaction after the Fed."

Gold futures have risen more than 42% since August. In early January, they surpassed the previous all-time high of $847 an ounce - a record that dated back 28 years.

As inflation and resulting demand for gold drives the price of the precious metal higher, supply concerns also support the commodity. The increasing popularity of gold worldwide has strained the ability of miners to unearth new gold deposits.

Though gold remains popular during times of economic uncertainty, it has historically failed to keep pace with inflation.

When the economy begins to strengthen, gold prices should eventually fall, as they did 28 years ago. After hitting the $847 mark in January 1980, gold futures fell 70% to $253 in August 1999.

"We should see gold fall again - possibly more than a bit," said Nadler.

Nadler believes that gold is selling with a $200 "anxiety premium," amid the credit crunch, but he expects to see a price correction as the effects of the rate cuts boost the economy in the latter half of 2008.

"When we reach a return to normalcy, we will see gold trading in the mid-$600 range," said Nadler.