Tumbling dollar, inflation and short supply behind gold rally

A tumbling U.S. dollar, inflation fears and supply shortfalls have driven up gold price, which briefly pushed past the psychologically important 1,000-dollar mark for an troy ounce on Thursday, analysts said.

Gold price rose sharply last year with a 32-percent rally and was up 20 percent this year. Analysts have believed hitting the 1,000-dollar level was just "a matter of time."

The devaluation of the dollar is the main driving force for gold's price hike, analysts said. The plunging U.S. currency made dollar-denominated assets like gold look cheaper and therefore helped drive buying by investors with stronger currencies.

"It's an investor-driven story, with the investor demand coming from U.S. dollar weakness," said Daniel Hynes, metals strategist at Merrill Lynch. Hynes predicted the trend would not abate "anytime soon."

Growing fears about a shaky U.S. economy and the Federal Reserve's interest rate-cutting campaign have plunged the greenback to record lows against other major currencies, especially the 15-nation euro.

The euro rose to a new high of 1.5625 dollars before falling back to 1.5587 dollars in late New York trading, still above the 1.5526 it bought late Wednesday. The dollar traded as low as 99.75yen before recovering to 102.04 yen Thursday.

For now, market players still expect a further interest rate cut by the U.S. Federal Reserve at its rate-setting session next week. A rate cut could add to the weakness of the dollar and drive up gold.

Secondly, worries about rising inflation have prompted investors to rush into gold to hedge against the risk.

U.S. consumer prices rose 4.1 percent last year, the fastest growth since 1990, and latest U.S. data showed inflationary pressure picked up recently.

The drivers for gold remain as investors buy precious metals to create a safe haven against inflation, a U.S. futures analyst said.

Besides, short supply has also contributed to the surge of gold. Supplies were not sufficient due to fast growth of investment demand and a limited increase in output.

Gold output stood at 2,477 tons in 2006, hitting a 10-year low. At the start of the year, power shortfalls forced some gold mines in South Africa, the world's second largest gold producer, to suspend production, leading to gains in gold price.

Back in the 1980s, gold reached 873 dollars an ounce, which is tantamount to 2,235 dollars now when inflation is taken into account. Given that, many analysts believe the current price is still well below historic highs and could rise further.

But other analysts warn risks may accumulate with every gain in gold price. The price could fall on profit-taking, they said.