Debt Crisis: Gold hits new record before rebound drop

Gold tipped above $1,900 an ounce.

Gold tipped above $1,900 an ounce.

Gold tipped above $1,900 an ounce against all major currencies bar the Japanese Yen as investors sought the safety of precious metals to protect their wealth after losing confidence in markets hit by the turmoil of the debt crisis.

However, soon after the price was pulled back 2% to $1,851.67 an ounce. This comes as the worst drop in almost two years after Moody’s downgraded Japan’s debt rating resulting to strong buying interest in Asia’s physical market.

A rebound to the drop followed as the sharp drop in prices triggered strong buying interest as Asia’s markets opened and a further rally in European equities, sending spot gold up 1.2%.

Investors insist drop is not correction

Whilst some gold investors fear the precious metal’s greatest drop in 18 months indicates the time to retrieve the money from gold assets, investment banks insist that calling the price dip a correction would be premature as prices have rebounded strongly.

Speculation remains over further drops from potential rises in maintenance margins from futures exchanges, as investors keep a watchful eye on the CME, the world’s largest futures market. At a time of market turmoil, exchanges routinely increase the margin requirements and apply daily trading limits to cover the risk of a default. Those already holding wealth in heavy gold stocks fear this will result to decreasing buying interest and drop the value even further.

Analysts argue the present macro environment suggests that this correction from $1,900 will be momentary. Firms indicate that gold will resist any dips from rising margins as prices have continued to hit new records despite CME raising margins for speculators and hedging last week which saw gold prices fall only momentarily to $1,748.70 before a strong buying interest pulled the value up again.

Further records forecasted as global recovery slows down

Banks have adjusted their forecasts to indicate that gold may reach $2,000 by the end of 2011, in what will be the metal’s 11th consecutive year on the rise and extend the annual gain from the current 34% to 41% of which 18% has been in August alone.

The price of gold in Swiss Francs, the strongest of the world’s major currencies during the latest financial crisis and deemed a safe haven by investors has risen by 20% in the last three weeks.

Given that there have been no solutions to the debt crisis, analysts believe the big picture outlook for gold remains robust for a considerable time despite the one-way charge into gold has characteristics of a bubble.

The fears of a recession are reinforced with forecasts gold may climb the most in more than three decades this year as investors and central banks boost their holdings on concern that global economic growth may stall amid a worsening sovereign-debt crisis in the U.S. and Europe.

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