Gold sprints to a new high

Spurred by more US, euro zone worries; but analysts warn of a possible sharp correction.

Gold continued its upward spiral to set new records at $1,593 an oz in London today, buoyed by a sharp drop in the dollar after global credit rating firm Moody’s warned the US may lose its top credit rating, the possibility of more stimulus by the Federal Reserve and Europe’s worsening debt crisis.

The yellow metal started its journey from yesterday’s close of $1,582.38 an oz. Sustained investor interest in gold as an avenue for hedging against the global economic crisis boosted the sentiment to set a new record. A couple of months before, GFMS Ltd, a London-based independent advisory firm, had forecast gold to hit $1,600 an oz during the current calendar year. This translated into the Indian market at a record of a little over Rs 23,000 per 10g.

Amid indications of another stimulus package by the US Federal Reserve, Moody’s has warned the country’s rating would be downgraded if Washington pumped fresh funds into the system to protect from a possible slowdown. Uncertainty around US budget and debt negotiations in its legislature, together with Federal Reserve chairman Ben Bernanke’s comment on the potential for further monetary easing, battered the dollar, helping support commodities. Consequently, the euro erased early gains to stand flat at $1.4191. Today, the dollar fell 0.2 per cent against a basket of currencies.

Europe, too
Also, the ongoing euro zone debt crisis added to gold’s lustre, raising investors’ hope for a sustained rise in its prices. Yesterday, Fitch Ratings downgraded Greece deeper into junk territory, citing the absence of a new and fully funded financing programme for the country.

“Prices of gold and silver are firming up on support from the euro zone debt crisis, helping a decline in the dollar against major global currencies,” said Gnanasekar Thiagarajan, director, Commtrendz Research.

Michael Noonan, Ireland’s finance minister, has warned the country was facing considerable challenges in regaining its economic sovereignty and it could not be taken for granted that it would get a cut in the cost of its European emergency loans.

Basant Vaid, senior research analyst at Bonanza Portfolio, said, “A weakness in dollar prices on the back of Moody’s threat to downgrade the US credit rating if the government missed debt payments, along with yesterdays’ comments by the Federal Reserve, which gave a hint that further stimulus may be provided to the states, pressurised the dollar prices. Jitters over the European economies after Fitch cut Greece’s ratings also underpinned gold prices, as the metal’s safe heaven appeal increased.”

Adding: “In the domestic market, the yellow metal is trading convincingly above the psychological resistance level of Rs 23,000 per 10g. If it sustains above this level on a closing basis, we may see prices moving higher, towards the contract high of Rs 23,148 next session. We have witnessed prices correcting sharply after breaching all-time highs. So, they are again technically vulnerable to a sharp downside. Although the fundamental factors are extremely bullish at the moment, investors should remain cautious and keep an eye on a possible technical correction.”

Meanwhile, spot silver rose to $38.61 an oz, the highest since May 31, before trading up 0.7 per cent at $38.52, tracking gains in bullion and extending the 5.6 per cent rise in the previous session. Gold for October delivery climbed 269, or, nearly 1.1 per cent to hit a peak of Rs 23,465 per 10g on the Multi Commodity Exchange.