The price of gold hit its latest record high, near $1,830 an ounce.
Gold prices have more than doubled since the recession began in late 2007. They have risen about 19 percent since the beginning of June, as European leaders struggled to keep the debt crisis from infecting the region's major economies and US politicians nearly drove the country to the brink of default, prompting Standard & Poor's to cut the country's AAA credit rating.
“Obviously, the downgrading of the US sovereign risk has caused the price of gold to move up so rapidly as investors are buying it as a safety net from the devaluation of the US dollar,” Basil M. Al-Ghalayini, chairman & CEO of BMG Financial Advisors, said.
The World Gold Council said Thursday that gold demand fell in the second quarter but is still expected to rise in the full year as Asian buyers add to holdings and interest in the metal as a haven is stoked by worries over US and euro zone debt.
In its quarterly Gold Demand Trends report, the WGC said signs of strength in the market remain concentrated in India and China, with the purchase of coins, bars, jewelry and gold-backed funds all declining in Europe and the United States.
Overall gold demand fell 17 percent in the three months from April to June to 919.8 tons versus the year-earlier period, as a sharp drop in investment demand offset a tentative recovery in jewelry buying, the gold mining industry-funded body added.
Interest in gold-backed exchange-traded funds fell particularly sharply, down 82 percent to 51.7 tons from 2010's extremely high levels. There are signs that this is already being reversed, Reuters quoted WGC Managing Director for Investment Marcus Grubb as saying.
"We are bound to get a strong investment number in the third quarter because of the euro zone sovereign problems," he said. "We know ETFs hit a new all-time high in tonnage terms in July and August, and in terms of jewelry demand, there doesn't seem to have been a lot of slackening from the strong turnout in Q2.”
Gold prices in Saudi Arabia have jumped by SR73,000 per kilo in a single year, Muhammad Azouz, deputy chairman of the National Committee for Precious Metals at the Council of Saudi Chambers of Commerce and Industry, told Al-Eqtisadiah business daily.
“In Saudi Arabia, the situation is similar as the riyal is pegged to the dollar. In the Saudi market, demand for gold has increased by almost 60 percent in spite of a rapid increase in its price. Hence, people are buying it as a hedging mechanism. Having said that, we really do not know how long this sudden and rapid growth in value will last. The future is bleak,” Al-Ghalayini said.
While gold has hit a series of record highs over the past 2 and a half months, the Standard & Poor's 500 has dropped about 15 percent. The metal's value, unlike that of a currency, doesn't depend on the health of a single country's economy. Its swift rise has made it popular with investors seeking big returns, as well as presumed safety from turbulent financial markets.
At midday, gold for December delivery, the most-traded futures contract, was worth $1,820.50 an ounce, up $26.70, or 1.5 percent. Earlier Thursday it hit $1,829.70 per ounce, a record high.
Still, when adjusted for inflation, gold remains below its 1980 peak of $850 an ounce. That's about $2,400 in 2011 prices.
“The extraordinary momentum we are seeing in gold prices reflects above all two factors,” Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said.
“First is the traditional safe haven perception which has been further enhanced by the S&P downgrade of the US and the growing lack of confidence in economic policy and policymakers around the world. Questions about the other safe havens have grown in number and intensity. Secondly, the increasing interest in gold also reflects the lack of attractive investment opportunities. With the OECD economies mired in crisis and many emerging markets afflicted by inflationary pressures, investors are seeking assets that seem reliable and can be expected to be easily traded. The search for security has become more important than the search for return as risks abound. The relative standing of gold in this regard is increasingly enhanced as mere cash is disadvantaged by inflation fears.”
He said the nature of gold demand in turn is evolving, adding that the traditional jewelry demand is somewhat price sensitive and has been repeatedly tested during the recent rally. However, the growing strength of investment demand is more than making up for this, he said. Such buying is further facilitated by the growing range of gold-linked products, such as ETFs, which are easily available and cost-effective, he added.
He claimed that central bank purchases are also on their way up with many emerging market institutions seeking to diversify their reserves. Given these trends and the patently obvious reality that no near-term solutions exist for the global crisis, gold is likely to remain in strong demand for some time, he added.
“Indeed, there are mounting indications that investor attitudes toward gold may be undergoing a structural shift which could even further accelerate the rally. Nonetheless, even with the serious crisis, we will see moments of relative stability and reduced risk aversion which many will take as buying opportunities,” Kotilaine said.
The WGC said central banks were net buyers of gold for the second successive quarter, adding 69.4 tons to their reserves. Recent official sector gold buyers have included the central banks of Mexico, Thailand, South Korea and Russia.
Central banks' transformation from net sellers to net buyers pressured overall gold supply down 4 percent to 1,058.7 tons, despite a 7 percent rise in mine production. Scrap sales also fell 3 percent.
