Investors reacted sharply to news about the UK budget deficit, sending gold prices to a record high of more than $1250 an ounce. A decreased appetite for risk by investors and continuing concerns about euro devaluation, could boost gold prices to over $1300 an ounce in the near term. See the following article from The Street for more on this.
Gold prices set a record high Tuesday as investors scrambled to buy the precious metal and risk appetite diminished.
Gold for August delivery was adding $8.40 to $1,249.20 an ounce at the Comex division of the New York Mercantile Exchange after reaching an all-time high of $1,254.50. The gold price today has also traded as low as $1,238.50. The U.S. dollar index was slipping slightly to $88.34 while the euro rallied 0.27% to $1.19 vs. the dollar. The spot gold price Tuesday was rising more than $6, according to Kitco’s gold index.
The risk trade was deteriorating fast, and investors fled into gold as a safe haven asset. Fitch ratings agency said that the U.K. is up against a “formidable” task to cut its budget deficit, and the news spooked investors and pushed gold past its old high of $1,249 an ounce.
“I think gold is smelling that these lows that we’ve held in the past few weeks in the equity markets are not going to hold and if they don’t gold will make that move towards that $1,300 or higher an ounce in the near term,” says Scott Redler, chief strategic officer at T3Live.com.
In times of financial turmoil and currency devaluation gold becomes the ultimate safe haven. A double digits rise in gold prices, like investors saw on Monday, represents a flood of fear in the markets. The euro rebounded modestly from its 4-year low of $1.18 but many analysts are looking at $1.16 as the next support area. As traders and hedge funds pile into gold and prices start moving fast and furious, many retail investors will jump into the trade for fear of missing the boat.
There are several supporting factors that help move the gold price such as peer pressure and central bank buying.
Scott Carter, executive vice president of Goldline International, a 50-year-old seller of precious metals, says “when there’s a spike in the price of gold, it’s somewhat counterintuitive, but you see buyers increase into the markets. So it’s almost like the train is leaving the station … if gold goes up 1%, 2% in a day we’ll see a dramatic increase in the interest.”
The advent of gold ETFs, which are physically backed, has given investors an easier, safer and faster way of buying gold. The most popular, SPDR Gold Shares(GLD), currently has 1,286.35 tons in its holdings, which is slightly less than its record of 1,289 tons. If investor demand outpaces available shares, more gold must be added to issue new stock. Shares were rising 0.41% to $121.99.
Another popular theory for strong gold price movement is central bank buying. Since the second quarter of 2009, central banks from emerging market countries like India and China have been reallocating their reserves with a strong push into gold. India and China hold 6% and 1.5% respectively as compared to the U.S. which holds 74% of its reserves in gold. Recently Iran joined this trend announcing it would sell 45 billion euros for U.S. dollars and gold.
Central banks typically never announce when they are buying gold for fear of moving the price higher but when they buy they typically purchase in large quantities and could be a possible factor in big price swings.
Double-digit price gains work both ways, however, some analysts believe that when the crisis premium, or fear trade, comes out of the gold market, prices could plummet to $800 an ounce.
“As the global macroeconomic environment stabilizes we continue to expect a significant decline in gold prices,” says Michael Crook – Vice President and Strategist at Barclays Wealth. “[We] initiated a recommendation that clients consider adding a short gold position into their portfolios.”
Gold prices broke through their previous high of $1,229 an ounce in early May but only sustained that level for a week, which has many investors wondering how long this momentum can last. Gold prices Tuesday have already backed away from its $1,254 high as U.S. stock futures pointed slightly higher.
Silver prices were rising 20 cents to $18.36 while copper was slightly lower at $2.75.
Copper prices have fallen 11% in the past week as investors worry that slowing global growth will curb demand for the industrial metal. Although Fed Chairman Ben Bernanke tried to reassure investors that the U.S. recovery was on track, China’s recent attempts to pop its real estate bubble and eurozone nations’ fervor to slash their budget deficits and reign in spending could weigh on prices. Shares of Freeport McMoRan Copper & Gold(FCX) have reflected these concerns with the stock down over 26% year-to-date. Shares were currently adding more than 2% at $60.25.
Gold mining stocks, a more risky but more profitable way to invest in gold , were rising. Barrick Gold(ABX) was adding 1.83% to $43.91 while Newmont Mining(NEM) was rising more than 3% to $56.91. Other large cap miners Kinross Gold(KGC) and Goldcorp(GG) were rising $17.54 and $44.75, respectively. Agnico-Eagle Mines(AEM) was adding more than 1.50% to $60.24.
This article has been republished from The Street. You can also view this article at The Street, an investment news and analysis site.