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Gold Rises to Four-Month High on Demand for Metal as Currency Alternative

Gold futures rose to the highest price since December on signs of increased demand for the precious metal as an alternative to holding currencies.

Gold priced in the euro, sterling and the Swiss franc extended rallies, rising to records for a second day after Spain’s credit rating was cut by Standard & Poor’s. Yesterday, S&P lowered its credit ratings for Greece and Portugal, sparking concern that Europe’s sovereign-debt crisis will threaten a global economic recovery.

“You’re seeing a general attraction to gold on a worldwide basis,” said Stephen Platt, a commodity analyst at Archer Financial Services Inc. in Chicago. “The sovereign-debt panic is spreading and forcing a flight to quality into gold.”

Gold futures for June delivery rose $9.60, or 0.8 percent, to $1,171.80 an ounce on the Comex in New York, after touching $1,175.30, the highest price since Dec. 4.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, expanded for a second day to a record 1,146.83 metric tons yesterday, according to figures on the company’s Web site.

Economists at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc said that European policy makers may need to come up with as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis. The financial turmoil in Europe has dragged down the 16-nation currency 8.3 percent this year against the dollar.

Store of Value

Investors concerned that governments will have to monetize their debt are turning to gold as a store of value, said Bart Melek, a commodity strategist at BMO Capital Markets in New York.

“There is the risk that some money will have to be printed and that means a reduction in purchasing power,” Melek said.

Gold rallied 24 percent in 2009 as the dollar fell 4.2 percent against a basket of six major currencies, including the euro. The metal has rallied for nine straight years, touching a record $1,227.50 on Dec. 3.

“There is a clear flight into quality to the gold market as frightened capital seeks a haven of any sort while confusion reigns,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter.

Gains this year may be limited as an economic recovery in the U.S. forces the Federal Reserve to raise interest rates, bolstering the dollar.

Price Forecasts

Gold will average $1,165 an ounce this year and $1,350 in 2011, Goldman Sachs analysts Eugene King, Peter Mallin-Jones and Andrew Byrne said in a report dated yesterday. In January, the company’s forecasts were $1,265 for 2010 and $1,425 for 2011.

Prices may be supported as investors switch focus from economic recovery to inflation, said Daniel Smith, an analyst at Standard Chartered Plc in London. In a study of price changes since 1983, Standard Chartered found that gold rallied an average of 18 percent in the months before the Fed’s first rate increase after a downturn.

Precious metals with wider industrial applications than gold fell. Silver futures for July delivery fell 1.4 cents to $18.135 an ounce on Comex. Platinum futures for July delivery dropped $7.30, or 0.4 percent, to $1,713.60 an ounce on the New York Mercantile Exchange. Palladium futures for June delivery declined $7.05, or 1.3 percent, to $541.90 an ounce on Nymex.

To contact the reporters on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net; Claudia Carpenter in London at ccarpenter2@bloomberg.net.

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