Oct. 7 (Bloomberg) -- Gold’s rally to a record shows commodity investors remain concerned that the U.S. economic recovery will spur inflation even as Wall Street forecasts and government bonds suggest stable prices.

Bullion has jumped 18 percent this year, heading for a ninth annual gain, and futures touched a record $1,049.70 an ounce today amid rising demand for a hedge against inflation and a weaker dollar. Economists surveyed in the past month expect U.S. consumer prices to fall 0.5 percent this year, the first drop in five decades.

Demand for gold is increasing as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates near zero percent. Inflation surged to a 14.8 percent annual rate in March 1980 after a four-year gain in gold that included a then-record $873 in January 1980.

“Gold is a forecaster of inflation instead of a coincident indicator,” based on its surge before 1980, said Dan Greenhaus, the chief economic strategist at Miller Tabak & Co. in New York. “There’s nothing right now that says inflation will break out to all-time highs. But gold can move considerably higher from here. Should growth return, inflation will return.”

GoldCore Forecast

Deutsche Bank AG forecast on Oct. 1 that gold may top $1,100 in 2010. Mark O’Byrne, an executive director at Dublin- based brokerage GoldCore Ltd., said demand for a hedge against financial risk will send the precious metal to $2,000. He didn’t specify a date. Gold for December delivery rose 0.5 percent to settle at $1,044.40 an ounce in New York. Gold for immediate delivery was little changed at $1044.60 at 5 p.m. in New York.

Gold producers also advanced on bullion’s gain. Newcrest Mining Ltd., Australia’s biggest gold-mining company rose 6.7 percent in Sydney today, and Sino Gold Mining Ltd. jumped 9 percent in Hong Kong. Newmont Mining Corp., the largest U.S. producer, rose to the highest in almost three weeks.

The outlook among gold buyers conflicts with government and economist forecasts as the U.S. emerges from the worst slowdown since the Great Depression.

Federal Reserve Bank of New York President William Dudley said on Oct. 5 that slowing inflation is “problematic” for the economy and that interest rates should stay low. His remarks bolstered comments made in the minutes of the Fed’s September meeting that “inflation will remain subdued for some time.”

Consumer Prices

Gross domestic product shrank in the past four quarters, including a 6.4 percent plunge in the first three months of the year, government data show. The economy will contract 2.6 percent in 2009, based on the median of 57 estimates in a Bloomberg survey as of Sept. 11. Consumer prices will fall 0.5 percent, before rising 1.9 percent in 2010, based on the median of 47 estimates collected by Bloomberg. The average gain in the previous decade was 2.5 percent.

Bond investors don’t see prices accelerating, based on the difference in yields between 10-year notes and similar- maturity Treasury Inflation Protected Securities. The so- called breakeven rate shows traders expect consumer prices to rise an average 1.75 percentage points annually over the next 10 years, compared with this year’s high of 2.13 percentage points in June.

Gold is gaining on concern that ballooning U.S. debt will continue to drive down the dollar. President Barack Obama has increased the nation’s marketable debt to an unprecedented $7.1 trillion as the government borrows to revive growth. Goldman Sachs Group Inc. predicts the U.S. will sell about $2.9 trillion of debt in the two years ending next September.

Looking Ahead

“The government will have to accept a higher level of inflation to get the economy going again,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, who began trading gold in the 1970s. “The gold market is looking four to six months ahead. This is a monetary rally.”

The gold price also conflicts with Wall Street’s consensus view of the dollar, which has slumped 6 percent against a weighted basket of six major currencies this year.

Dollar Forecast

Deutsche Bank said on Oct. 1 that the U.S. currency will fall to $1.60 per euro in 2010, a drop of as much as 8.7 percent from yesterday’s $1.4722, because of “rising fiscal deficits and loose monetary policy.” The metal usually moves in the opposite direction of the dollar, which slumped 4.8 percent against the euro this year.

“Even though we’ve not seen rampant inflation, gold has been pushing higher because it’s no longer just a hedge against commodity inflation, it’s also a hedge against a change in world monetary standards,” said Phillip Gotthelf, president of Equidex Brokerage Group Inc. in Closter, New Jersey. He expects gold to trade at $1,250 by the end of the year.

Gold has more than tripled in the past eight years as the dollar tumbled 60 percent versus the euro, according to data compiled by Bloomberg.

There is an “extreme amount of liquidity that has been injected in the financial system, not just in the U.S., but around the globe,” said James Sinclair, a commodity investor and the head of Tanzanian Royalty Exploration Corp., which explores for gold.

“Gold is competition to currencies,” said Sinclair, who expects the precious metal to reach $1,650 by early 2011. Sinclair was interviewed on Bloomberg Radio.

Dollar Rebound Predicted

The slump will abate and the dollar will rebound to $1.46 against the euro by year-end, and to $1.45 by March 31, according to the median forecast of 48 analysts surveyed by Bloomberg News. Forward rates suggest the dollar will be little changed in six months, at around $1.47.

Miller Tabak’s Greenhaus said the outlook for the dollar may need to change. “If there’s a decline in your currency, it takes more of that currency to buy something,” he said. “Gold is seen as a currency itself and a store of value. It is better than any currency because you cannot print more gold.”

Gold is appreciating along with other assets, from commodities to stocks, because money is so cheap, said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois.

The Fed has kept its target rate for overnight loans among banks between zero and 0.25 percent since December to help stimulate the economy. The Standard & Poor’s 500 stock index has gained 17 percent this year, and the Reuters/Jefferies CRB Index of 19 commodities advanced 13 percent, including a 97 percent jump in copper, a 56 percent rally in crude oil and a near- doubling of sugar prices.

“The momentum for gold is higher from here,” Kaplan said. “The Fed has sent so much money into the market, so everything has to go up, including gold.”

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Last Updated: October 7, 2009 17:24 EDT