Tags: gold | record gold price | debt crisis | safe haven

Gold on a Wild August Ride

Friday, 19 Aug 2011 03:18 PM

Gold prices have soared over the past year, as the precious metal has performed its traditional role of acting as a hedge in times of economic uncertainty.

Gold prices are trading around $1,840 an ounce — even flirting with $1,880 in a recent session — as economic woes in the U.S. and Europe punish equities markets and send investors fleeing to the precious metal as a safe haven.

Gold prices are up around 14 percent in the last 30 days and over 47 percent in the last year, according to goldprice.org.

At the close of trading on Aug. 5, the day Standard and Poor's announced it had downgraded U.S. debt rating from AAA to AA+, gold finished the session at just over $1,660 an ounce, around 11 percent below where it is today.

U.S. financial institution JPMorgan says gold should hit $2,500 by the end of the year, according to the Financial Times.

Ross Norman, of Sharps Pixley, a gold brokerage, says the spike in gold demand illustrates the extent of the clouds building on the global economic horizon.

"The gold market is telling us that we are potentially heading towards a second and perhaps more damaging economic crisis," Pixley tells the Financial Times.

Experts say the price will go higher not just because of its role as a hedge but because it has more room to run in historical terms.

In 1980, gold prices hit $850 per troy ounce, which in today's inflation-adjusted dollars equals approximately $2,325, says Mark Thomas, Chief Investment Strategist at highergoldprices.com, according to the news site seekingalpha.com.

"We think it will exceed that prior level and continue to rise. This is based on the vast expansion of money in credit in all the years since 1980," Thomas says.

Furthermore, there is nothing out there that can replace gold.

High oil prices can fuel demand for alternative energies, but man has been trying for centuries to create gold to no avail.

"Gold and silver are such unique elements with so many unique properties," Thomas says. "Therefore, the chance of a gold or silver substitute being developed is almost impossible. It hasn't happened in thousands of years and it probably never will."

Other experts agree that gold will remain attractive as long as fear grips other markets.

"Investors are running scared into gold because of the persistent problems and recession-like performances in Europe and United States," says Jeffery Nichols, senior economic adviser at Rosland Capital and managing director at American Precious Metals Advisors, according to CNNMoney.

Fiscal and monetary stimulus programs designed to boost demand and investment have, as a side effect, weakened the dollar, which creates inflation or fears of such, a key factor in sparking gold demand.

Furthermore, fears of a debt crisis infecting European banks and spreading abroad is making gold even more appealing.

"There is further decay in the European situation," Sterling Smith, an analyst at Country Hedging, tells Bloomberg. "The nervousness in the equity markets is pushing people toward gold."

Experts say keep looking for gains in the both the near- and long-term. "If gold continues to climb at this rate for the next few days, we may touch $2,000 by the end of this month," Smith says.

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