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Familiar formula: Gold at new high as the dollar sinks

October 5, 2010 | 11:25 am

Gold has soared to yet another record high Tuesday, thanks to a familiar sequence of events: Central bankers pledge new moves to flood the financial system with more money. The dollar weakens. Buyers pile into gold and other hard assets as an alternative to paper currencies.

Near-term gold futures in New York surged $23.50, or 1.8%, to an all-time high of $1,338.90 an ounce. Gold’s gain for the year so far: 22%.

Silver was even hotter Tuesday, up 70 cents, or 3.2%, to a new 30-year high of $22.71 an ounce.

The Bank of Japan overnight cut its key short-term interest rate to virtually zero from what was already virtually zero (0.1%) and said it would set up a fund to buy bonds and other financial assets, hoping to spur the economy -- and weaken the yen.

Goldbunny The yen part isn't working as planned: The Japanese currency has strengthened slightly to 83.24 per dollar from 83.36 on Monday. The yen is nearing the 15-year high of 83.04 reached on Sept. 14, a big potential problem for Japan's exporters.

It's the dollar that's weaker Tuesday, with the DXY index of the greenback’s value against six other major currencies falling 0.9% to 77.73, its lowest level since January.

Federal Reserve officials have been on an apparent campaign the last few days to make clear they're leaning toward ramping up the central bank’s purchases of Treasury bonds later this year -- so-called quantitative easing. The goal, as with the Bank of Japan's move, would be to get more money into the financial system and, hopefully, into the real economy.

Precious-metals buyers see that prospect as assuring further debasement of paper currencies.

The metals' continuing surge also may reflect that investors see policymakers as running scared.

"The decision by the Bank of Japan to purchase everything in sight except for stocks reflects the desperate situation of the central bank," said Ashraf Laidi, chief market strategist at CMC Markets in London.

But it's all good for the markets so far: Stocks are taking their cue from decent economic news. The Dow industrials were up 186 points, or 1.7%, to 10,936 at about 11:25 a.m. PDT.

And Treasury bond yields are staying at or near recent lows, counting on the Fed to make good on its quantitative-easing promises. The 10-year T-note was at 2.47%, up just 0.01 point from late trading Monday.

-- Tom Petruno

Photo: A solid gold rabbit at a Tokyo Ginza shop. Approximate value: $19,000. Credit: Yoshikazu Tsuno / AFP/Getty Images