Debt Crisis: Gold Reaches Record High



Gold is traditionally seen as a safe haven in times of risk.

Gold is traditionally seen as a safe haven in times of risk.

 

Gold tipped above $1,800 an ounce in Europe as investors lost confidence in the markets hit by the US debt crisis and Eurozone turmoil. The price of gold has consistently been on the rise hitting a series of record highs over the last few weeks, boosted by the worries over a stalling economic recovery and crippling sovereign debt.

Banks and governments bolstering stocks

With forecasts of the price reaching $3,000 an ounce in years to come, banks and governments are beginning to add to their stocks. For the first time in 21 years, central banks have emerged as the net buyers of gold following decades as the net sellers of what was thought to be a non-yielding commodity in front of the more profitable sovereign debt instruments. This comes 12 years after former chancellor Gordon Brown sold off more than half of Britain’s reserves in 1999. Gold is up more than sixfold since the Treasury’s controversial decision, which cost British taxpayers almost £7 billion.

As forecasts become wider by the day with gold repeatedly hitting record highs since the financial crisis, investors believe western governments will print more money through quantitative easing to stimulate economies. During current times of uncertainty with devaluing currencies, there is an increasing appeal of gold as the ultimate safe-haven acting as an inflation hedge.

Precious metals remain the best performing asset class

Banks have recently indicated that gold could top $2,600 an ounce over the next two years amid fears that the sovereign debt crisis is far from over. At that level it will break through the inflation-adjusted record of $2,400 in 1980, when western economies were at the brink of collapse. Investment firms are treating gold as a currency in itself, with those fleeing the euro often choosing gold instead.

Last week’s heavy losses in the stock market led by steep decline in banking shares sparked record trade volumes in gold futures and option contracts totalling more than 500,000, surpassing last year’s record. Following last week’s heavy trading which saw an increase by the Shanghai Gold Exchange of 10pc, CME, the world’s largest futures market, said that it would raise its gold futures maintenance margins for speculators and hedging. As a result, gold prices fell from their record high and are now trading at $1,748.70.

Amid renewed uncertainty over the outlook of the global economy, precious metals including silver and platinum remain as the best performing asset class of 2011.

 

 

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