[miningmx.com] — GOLD rallied above $1,500 an ounce for the first time on Wednesday, extending this week’s run of record highs as investors sought to hedge growing inflation risks and bought into a broad commodities rally.
Mounting evidence of quickening inflation in major Asian economies such as China and India were echoed in Latin America on Wednesday, with Brazilian prices nearing a government ceiling and Mexico’s yearly rate exceeding a key target. The break-even rates on US Treasury Inflation-Protected Securities (TIPS) rose for a second day.
A second day of deep losses for the dollar and near 2% gains in oil and grain markets that fueled further inflation concerns also buoyed bullion, which once again rose in tandem with riskier assets like equities as investors shifted their focus from gold’s role as a safe-haven play to its potential as a store of value.
“People are buying any kind of risk assets almost without discretion across the commodity complex, and gold and silver are part of them,” said Mark Luschini, chief investment strategist of broker-dealer Janney Montgomery Scott, which manages $53bn in client assets.
Spot gold rose to an all-time high of $1,505.70 an ounce. Silver also rose to above $45 for the first time since 1980.
Gold has notched new records for four consecutive days, aided in large part by Monday’s threat of a downgrade to the United States’ triple-A credit rating and lingering euro zone debt worries that have depressed the dollar.
INFLATION PRESSURE CREEPING UP
Signs of simmering inflation across the world underpin gold. The break-even rates on the expected new five-year US Treasury Inflation-Protected Securities, which measures investors’ inflation expectations over five years, rose for a second day to 2.37%, roughly one basis point higher than late Tuesday.
In Brazil, annual inflation sped dangerously near a government ceiling in the month to mid-April, while Mexico’s yearly inflation rate climbed above policymakers’ target rate of 3.0% as investors prepare for higher borrowing costs early next year.
Buying in the Asian countries is being fueled by rising consumer incomes and higher inflation, against which gold is traditionally seen as a hedge. Both China and India reported higher than expected inflation last week.
While gold investors in Western markets have been motivated chiefly by risk aversion in recent years, the precious metal is a much more deeply established asset in Asia. India and China are by far the world’s biggest bullion consumers.
While buying of largely Western-based bullion-backed exchange-traded funds has tailed off this year, the slack in demand has been picked up by investors in bullion bars and coins, particularly in the Indian and Chinese markets.
DOLLAR, CREDIT RATING IN FOCUS
With the US currency in particular seen as a key driver of gold prices, uncertainty over how the United States will adjust monetary policy – after its second round of
quantitative easing comes to an end in June – is set to keep the metal underpinned.
Standard & Poor’s said on Monday it might cut its long-term rating on the United States within two years, unless Washington can rein in its budget deficit.
If it were to do so, the dollar may come under pressure, impacting currency market and economic stability throughout the world – a perfect recipe for higher gold prices.
“Gold has been acting as a currency in its own right, and that is why we are up at $1,500,” said Simon Weeks, head of precious metals at the Bank of Nova Scotia.
Gold has long been seen as the ultimate haven from risk.
During the financial crisis that rattled markets in 2009 and 2010 it was heavily bought on that basis, but its rally has since taken on a momentum of its own.
While gold prices are well below their inflation adjusted highs of more than $2,200 struck in 1980 at a time when bullion prices spiked in response to the Soviet invasion of Afghanistan, gold has held its own in recent years against rising prices.
