Gold Near $1250/oz Second Straight Record

The price of gold continues to hit all-time highs as unnerved investors seek a safe alternative to currencies clobbered by Europe’s financial crisis and growing worries about sovereign debt.

Gold climbed to a second successive record high on Wednesday as investors bet that a proposed $1 trillion (672 billion pounds) European rescue will either fail to prevent a worsening euro zone crisis or will stoke inflation. Gold prices long moved in an inverse relationship with the U.S. dollar, climbing when the greenback fell, as it did for years during the last decade. But in recent weeks, gold has broken free of that link, blazing a trail of its own as investors flee the euro and other currencies. The euro has dropped 12 per cent against the U.S. dollar this year.

Normally, an updraft in the U.S. dollar would weigh on gold prices. But gold just keeps going higher, shooting up $22.80 (U.S.) or nearly 2 per cent Wednesday to about $1,243.10 an ounce, after hitting a record intraday high of $1,247.70. It’s risen more than $150 an ounce from just a few months ago, before serious concerns about Europe’s financial state set in.

“Gold is going up because there is a real concern about monetary debasement,” said Martin Murenbeeld, an economist with Dundee Wealth.

The metal is gaining independence as a broader investor base buys in. Experts also point to the growth of gold-based exchange-traded funds.

And as sovereign debt rises in many countries worldwide, some central banks, including those in India and China, are also adding gold to their reserves. Once investors such as central banks buy gold, they rarely sell it, said Peter Munk, founder and chairman of Barrick Gold Corp., the world’s largest gold producer.

“A new layer of people are joining the committed buyers of gold because they lost confidence,” Mr. Munk said in an interview.

European countries are now trying to work though their debt problems by taking on more debt, he noted.

“People just can’t believe that we can solve major debt issues by adding more debt,” Mr. Munk said.

For most traders, the focus remained squarely on Europe’s efforts to stop the Greek debt crisis from spreading to other countries, although some also said that options-related buying and technical momentum had contributed to the gains.

“There is still a lack of confidence in the European community whether or not this is going to halt the euro’s decline because this is nothing more than an experiment, and people are not sure if anything will work,” Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

Spot gold hit $1,248.15 an ounce, a gain of nearly 20 percent since early February. It was at $1,245.25 an ounce at 2:22 p.m. (7:22 p.m. British time) from $1,232.05 late in New York on Tuesday. Prices have risen 3.5 percent in two days.

U.S. gold futures settled up $22.80, or 1.9 percent, at $1,243.10 an ounce.

Barclays Capital said that the two key drivers of gold are concerns about the stability of the global financial system and the risk of currency debasement or inflation.

“While the first of these concerns may have been eased by the massive EU/IMF rescue plan, the second has arguably been heightened by it,” Barclays said.

While gold companies benefit from the rising price, Mr. Munk said he shudders at the thought of gold prices flying out of control if the financial crisis deepens.

“I just hope there’s a limit to this lack of confidence, because we don’t want the panic to spread,” Mr. Munk said. “We don’t want to live in countries where confidence in our currencies, confidence in our fiscal management, is so undermined that we all have to buy more and more gold.”

Gold has been long viewed as a hedge on inflation, which is what’s also driving its recent rise, according to Bart Melek, a global commodities strategist at BMO Nesbitt Burns.

“We have a debt problem and investors believe that down the road there will be temptation to print money to balance the books,” Mr. Melek said. “It’s a flight to safety.”

While gold has hit a record high, gold companies are still waiting for their stocks to catch up to highs reached in late 2008, when the global financial crisis sent many of their stock prices soaring. Gold stocks have been hurt by competition from exchange-traded funds, as well as rising capital costs and competition from other commodities that have recovered since the recession.

However, since the European debt issue blew up last week, gold companies such as Barrick, Kinross Gold Corp, Goldcorp Inc. and Agnico-Eagle Mines Ltd. have all seen their stocks rise steadily.

REUTERS

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