Spot gold prices rose steadily throughout the Asian session on Friday, opening in London at $664 per ounce.
Gold futures for delivery in Feb. '08 closed the week 0.5% lower in Tokyo. The physical market moved higher from last Friday.
According to metals analysts, the current strength in gold comes from rising oil prices.
But the real driver of gold right now looks to be the threat of much lower interest rates – after inflation – in the United States.
"I hate to speculate on the price range but I think very easily we can see $700 gold," said Stephen Orr, CEO of Oceana Gold, the Australian miner, at a conference on Thursday.
"We think that all the fundamentals that have supported the price over the last couple of years are still in place.
"Because of the inflationary environment in the world, cost has gone up. So that's kind of provided a new and higher floor for the gold price that didn't exist before."
Associated Press reports today that US milk prices could rise 9% by the fall, driven by higher fuel and feed prices.
Food prices charged by US producers have already risen 6.8% from this time last year according to Washington's official data.
Figures from the US Department of Agriculture also warn that the carry-over of coarse grain production from this year to next "could be the lowest – in relation to consumption – in decades," reports MoneyWeek.
And if – in response – "Wal-Mart and McDonald’s raise their meat prices month-after-month," says Donald Coxe of BMO Financial Group, "then consumers will be getting sticker shock weekly at the checkout counters.
"They will not be willing to accept Fed statements that inflation remains within acceptable ranges."
(Why does the gap between inflation and interest rates matter to gold investors? Click here to find out...)
Crude oil prices continued to rise overnight, hitting $66.51 per barrel at the London opening and gaining 7% from last Friday – when Iran seized 15 members of a Royal Navy patrol in the northern Gulf.
The United Nations Security Council yesterday expressed "grave concern" at their detention, and urged Tehran to give British diplomats access to the group.
But the UN backed away from demanding immediate release.
"Gold is slightly up this morning as Iran tensions are building up, and oil prices moved higher," noted Mao Jian, a trader at the Bank of China in Beijing earlier.
Oil prices leapt to fresh highs for 2007 so far on the Iranian action. With one-quarter of the world's oil tankered through the neighbouring Straits of Hormuz, "people are still concerned about the continuity of supply," says Rob Laughlin, a senior broker at Man Financial in London.
"Any thoughts of a speedy release have gone. There is a threat, and it's two million barrels a day at stake."
Looking ahead, the US opening will bring a slew of data for professional Fed watchers.
US personal income and spending numbers for Feb. are due alongside the fresh Purchasing Managers data and construction industry figures.
Spending by the US construction industry hit 13% year-on-year growth at the start of 2005. Since then, however, it's been downhill all the way according to the US Census Bureau.
The change in spending, annualized, slipped to -0.8% in Jan. '07. Wall Street economists now expect the Feb. data to show a -0.6% drop.
Anything greater, and the Dollar is likely to move lower on expectations of a cut in Fed interest rates soon. (What next for the US housing crunch? Find out here...)
"The trouble in the mortgage industry in the US is going to constrain the Fed's ability" to fight inflation, noted Stephen Orr of Oceana Gold in further comments to Reuters yesterday.
"In fact, they are going to be under pressure to ease monetary policy.
"If they ease monetary policy, the US Dollar is probably going to drop and that's good for the gold price. We expect the gold price to actually increase as a result of that."
To learn more about the link between US interest rates and gold prices – measured in all major currencies – click here now...