Gold hits new record high

Article By: Sherilee L Lakmidas

Tue, 02 Aug 2011 6:10
Iafrica.com News - http://business.iafrica.com/news/744816.html

The gold price added more than US$20 dollars an ounce on Tuesday, reflecting the lingering fears of investors over the health of the global economy.

Gold rallied to a fresh all time high of $1642.10 an ounce on Tuesday and by mid-afternoon was trading at $1640.70, having gained $22.70 an ounce from its previous JSE close of $1618.

The precious yellow metal's latest push upward came following a spate of poor economic data from the US, Europe and China that suggested that global economy growth was still sliding.

It also moved higher despite the US's last-minute approval of a debt deal that saved it from default.

Overnight the compromise deal that would raise the US debt ceiling by $2.1-trillion and cutting spending by up to $2.5-trillion over the next decade was pushed through but the move has not appeased skittish investors who realise that the move is a prelude to a long-term tough fiscal consolidation in the world's largest economy.

"Despite news that the US had tentatively reached an agreement to extend the debt ceiling, this important news seems to have now been eclipsed with the markets also very much concerned that the US may see a downgrading by credit agencies," said Ross Norman, a precious metals analyst at Sharps Pixley in London.

Investors have also still not dismissed the threat of another global economic crisis with European economies still at risk.

Europe, which holds around 35 percent of South African government debt, is fighting to keep its head above debt.

On Tuesday Spanish and Italian bond yields, or interest rates, hit record highs while the euro lost ground against most major currencies.

The yield on Italian 10-year bonds rose to nearly 6.3 percent during the day while the equivalent Spanish bonds went up to almost 6.5 percent early on Tuesday.

Countries effectively lose the support of international markets once their yields reach seven percent, when margin calls are triggered.

"The market place is fickle but many times predictable in its actions," said Jim Wyckoff of Kitco News in a note on Tuesday.

"However, it was also a 'buy the rumour, sell the fact' scenario regarding the US debt deal and the market place. And as expected, the market place has now moved on to other worries, this time regarding a potential US debt downgrade, the EU debt crisis, and a world economic slowdown," Wyckoff said.

Also supporting the yellow metal Tuesday was news of purchases of gold by central banks.

South Korea's central bank acquired 25 tons of gold in June and July - its first purchase since the Asian financial crisis more than a decade ago.

This takes its total gold holdings to 39.4 tons at the end of July and increases the gold portion of South Korea's official foreign reserves to US$1.32-billion at the end of July from US$80-million at the end of June.

In the meantime, the Greek central bank added a further 1000 ounces of gold to its reserves in June - the second increase in two months. This brings its gold reserves to 3.585 million ounces, which is down slightly from the 3.601 million ounces held in May 2010 after the central bank sold a small amount of its holdings last year.

"News that both the Korea and Greek Central Banks had both acquired gold has provided a powerful indicator that investor interest is not the only factor driving the market higher. The switch into gold by central banks is very much a reversal of the policy a decade ago and with concerns about the ratings attached to US debt that momentum can only intensify," said Norman.

Looking ahead we see the momentum amongst gold buyers being maintained and fully expect gold to achieve US$1,850 this year," said Norman.

This was Sharps Pixley's forecast at the beginning of the year and Norman says it is sticking by this view. Its forecast was the highest of 25 analysts surveyed by the London Bullion Market Association at the beginning of the year. All forecasters expected gold to hit record highs this year, with a predicted average high of $1633 an ounce.

"Gold is a barometer and it is giving a very clear signal - that signal is saying that there are some deep and fundamental economic issues that remain unresolved and it does not see the political will or courage to make the changes that are necessary," said Norman.