Gold prices are pushing further into record territory, with gold futures brushing against the psychologically important $US1500 level overnight, as investors, wary of paper currencies, increasingly seek refuge in the precious metal.
In New York trading, the most actively traded gold contract, for June delivery, climbed 0.2%, or $2.20, to close at a fresh record of $1495.10 an ounce. In afternoon trade, June gold had soared as high as $1500.50 an ounce.
Investor interest in gold was spurred by Monday’s decision by ratings agency Standard & Poor’s to downgrade the outlook on US government debt to “negative” from “stable”. The rating agency pointed out there was “a material risk that US policy makers might not reach an agreement in how to address medium- and long-term budgetary challenges by 2013”.
The S&P warning decision has highlighted the problem that the debt levels of the major developed countries are spinning out of control, and political leaders are seemingly incapable of coming up with solutions.
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The dilemma was summed up well by billionaire investor George Soros, who said last weekend that he found the current situation more baffling, and much less predictable, than at the height of the financial crisis.
“There are clearly a number of unsustainable situations which nevertheless continue, and the authorities don’t necessarily try to solve them, but merely try to buy time. We live in this situation without an immediate collapse or an immediate solution confronting you.”
The potential downgrade of the US government’s credit rating has spooked some investors, causing them to seek safety in gold. The US Treasury market is the largest and most liquid credit market in the world. And because US Treasury bonds have traditionally been considered a “safe haven”, they set the global risk-free rate, which is used for setting the price of other financial market assets. A downgrade of US government debt would be likely to push US bond yields higher, putting downward pressure on the prices of other financial assets.
The potential downgrade of US government debt also threatens the role of the US dollar as the global reserve currency. The US dollar is already under pressure because of the ultra-loose monetary policy being pursued by the US central bank.
At the same time, however, investors have been unnerved by the continuing tussle between Germany and the European Central Bank over the need to restructure Greek debt.
Greece’s borrowing costs reached fresh euro-era highs overnight, with yields on three-year bonds climbing to 21.37 %, after Clemens Fuest, who heads the German finance ministry’s technical advisory committee, reportedly said that a Greece’s extremely weak balance sheet made a restructuring of the country’s debt inevitable.
At the same time, however, an ECB executive board member Jürgen Stark warned of the impact of such a move on Greece’s banks in an interview with a Portuguese newspaper.
There are also fears that Portugal’s bailout could become much more difficult following the strong vote for the eurosceptic party, the True Finns, in Finnish elections on the weekend.
If Finland decides against contributing funds, the proposed €80 billion ($US115 billion) Portugal rescue package is likely to proceed, with other countries covering the shortfall. But it’s clear that, across the eurozone, political support for further bailouts is becoming much more tenuous.
The gold price has climbed by about 30% in the past year, reflecting mounting concerns over soaring government debts in the developed economies, combined with worries for the ultra-loose monetary policies being pursued by most of their central banks.
Some traders argue that these factors are likely to propel the gold price to even higher levels. Others, however, caution that the gold price could well stall, now that it has hit the psychologically important $1500 level, and with central banks around the world beginning to tighten interest rates, or in the case of the US central bank, at least beginning to ponder the end of its ultra-stimulative quantitative easing program.
*This article first appeared on Business Spectator.