Gold soars over $1,700 on debt fears

Gold soared over $1,700 an ounce on news that the US debt had been downgraded by S&P. This same news also brought the stock market crashing down and many investors are looking towards Tuesdays Fed meeting to see what lies in the future for the Federal Reserve.

By Frank Tang
Mon Aug 8, 2011 3:48pm EDT
REUTERS

(Reuters) - Gold surged more than 3 percent on Monday, surpassing $1,700 an ounce for the first time, after Standard & Poor's cut the top-notch AAA credit rating of the United States, setting off an investor stampede for safety.

In a rout reminiscent of the 2008 financial crisis, Wall Street plunged as much as 6 percent and other commodities collapsed as panicky investors sought refuge in bullion and U.S. Treasuries.

Analysts scrambled to revise up gold forecasts and gold volatility spiked as options traders put on bullish bets.

News on Sunday of a European Central Bank bond-buying program to help shore up Italian and Spanish debt proved too little to soothe global market fears of a double-dip recession, greater government intervention and further market turmoil, any of which could extend gold's 15 percent rally since June.

In the first session since S&P's downgrade, U.S. gold futures were headed for their biggest one-day gain since March 2009. Traders are now looking ahead to Tuesday's Federal Reserve's policy meeting, with growing expectations it may hint at an even longer period of ultra-easy monetary policy further.

"Investors are looking upon the ECB bond-buying as the first step toward the same kind of quantitative easing program the Fed is doing. So, gold acts as the only currency that you can't print more of, and you are seeing a huge institutional demand for it," said James Rife, an assistant portfolio manager at Haber Trilix Advisors, which manages $2 billion in assets.

Spot gold was up 3.1 percent at $1,714.09 an ounce by 2:39 PM EDT (1839 GMT), having hit a record $1,719.99 earlier and marking all-time highs against sterling and euros.

Adjusted for inflation, bullion is one of the few in the commodity complex trading below its adjusted all-time highs, estimated at around $2,500 an ounce.

JPMorgan (JPM.N) said on Monday it expects spot gold prices to climb to $2,500 an ounce or higher by year-end, on very high volatility, following the downgrade of U.S. debt. The U.S. bank said that its previous estimate of $1,800 was "too conservative.

The prospect of an even longer period of low U.S. interest rates prompted Goldman Sachs (GS.N) to raise its three-month forecast for the gold price by about $100.

Silver rose 1.9 percent to $39.03 an ounce.

The CBOE Gold ETF Volatility Index .GVZ, which is often referred to as the "Gold VIX" and is based on SPDR Gold Trust (GLD.P) options, spiked 30 percent to its highest since May 2010.

"At any given moment the world's central banks could step-up in an effort to calm a frantic situation. Gold may have been a one-way bet for some investors but as the risks to growth reach boiling point, so too does the price of protecting against a volatile movement in either direction," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

As Wall Street tumbled, the shares of gold producers including as Newmont Mining (NEM.N) and Barrick Gold (ABX.N) topped the U.S. percentage gainers, and SPDR Gold Trust, the No. 1 gold exchange-traded fund which largely tracks bullion prices, rose sharply.

The price of the yellow metal also rose above that of platinum for the first time since December 2008. Platinum prices turned lower on worries about demand from the car makers. Platinum was last priced at $1,712.74 an ounce.

Palladium was down 2.5 percent at $721.22. Palladium has fallen by about 14 percent in the last six sessions from a five-month high, weighed on heavily by auto demand worries.

(Additional reporting by Doris Frankel in Chicago, Amanda Cooper and Jan Harvey in London; Editing by Alden Bentley)

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