Gold Hits a Record $1,000 an Ounce

As the jittery stock market continues to disappoint investors, the price of gold keeps right on climbing. Gold hit a record $1,000 an ounce in New York trading today. The move pushed gold to a psychologically significant mark similar to oil's recent surge into $100-a-barrel territory. Yet gold is still well short of its inflation-adjusted peak of around $2,200 an ounce, which it hit in 1980 (when its nominal price reached $850 an ounce).

So what's pushing gold skyward?

The weak dollar: Gold prices tend to move in the opposite direction of the U.S. dollar, as investors move cash into the precious yellow metal to hedge against inflation. "There is an inverse correlation of minus 70 percent with the dollar and gold," says Frank Holmes, the CEO and chief investment officer at U.S. Global Investors, which runs gold-related mutual funds. As the greenback makes record lows against the euro—and 12-year lows against the Japanese yen—the upward pressure on gold prices has intensified.

Rate cuts: The Fed's rate-cutting campaign—which has slashed the federal funds target rate from 5.25 to 3 percent—has played a role as well, says David Gitlitz, chief economist at Trend Macrolytics. Rate cuts put more greenbacks into the market, thereby reducing the currency's value and increasing the price of dollar-denominated commodities like gold. "What we're seeing here is a real weakening of purchasing power, and that's showing up as a weakening dollar and higher gold prices," Gitlitz says. This impact is expected to gather steam as Fed policymakers are widely expected to cut interest rates again on March 18.

Surging oil: Escalating oil prices—which are making records of their own—are stoking concerns about inflation, prompting investors to buy up gold as insurance against future price increases. "There is a high correlation—a 90 percent correlation—with the price of oil and the price of gold," Holmes says. "So when we have oil strong and the dollar weak, you get a much bigger amplitude on the upside with gold."

Outlook: Scott Meyers, an analyst at MF Global's Pioneer Futures, says that given the shakiness of the U.S. economy, gold prices have yet to peak. "The trend is clearly up," he says. But Meyers expects a bumpy ride, predicting "high, high, high volatility—with a lot of buying and selling opportunities—[but] the trend is up."