Ethel Hazelhurst
Gold hit a record high for the second day running yesterday on rising fears of debt default and future inflation. Spot metal touched an intraday best level of $1 594 (R10 933) an ounce and set a record fix of $1 592.50 in the morning in London before dropping back to $1 590.50 at the afternoon fix. Yesterday’s run-up followed a surge to $1 585.50 the previous day.
The precious metal’s price has soared from $1 487 at the start of the month, spurred by the deepening debt crisis in the euro zone. And yesterday’s move came when Moody’s Investor Services put the US’s triple A credit rating under review for a downgrade.
In April, Standard & Poor’s took similar action, changing its outlook for the US to “negative” from “stable”. And several euro zone countries have seen their credit ratings slashed, some to junk bond status.
Gold could breach the $1 600 barrier if US politicians continue to disagree on increasing the government’s $14.3 trillion debt limit, placing the US in danger of a technical default. The US is in financial straits and whether or not it avoids technical default, Washington is likely to print more money to keep the economy afloat.
Market fears about inflation were reinforced on Wednesday when US Federal Reserve Board chairman Ben Bernanke signalled he would pump more money into the banking system.
Paul Stewart, the managing director of Plexus Asset Management, said: “Next year the gold price will be substantially higher than it is now and the following year it will be substantially higher than that.”
Stewart said governments struggling to repay debt could either default or inflate their way out of debt. By printing money, debtor governments can reduce the real value of their debt, provided they are able to pay in their own currency – an option open to the US because the dollar remains the world’s reserve currency.
“Investors could put their funds in emerging market currencies,” Stewart said. “But many have a deep distrust of emerging market politics.”
The alternative is gold, the traditional hedge against inflation. The recent surge in the price is a reflection of a weaker dollar as investors see the buying power of the US currency shrink. In addition, support is coming from physical demand from India, according to Jessica Cross, the chief executive of UK-based consultancy Virtual Metals.
But with bad news on both sides of the Atlantic, the euro and dollar are weak, according to Rand Merchant Bank (RMB) currency strategist John Cairns. As a result, the rand has moved in two directions.
Cairns said the currency was badly hit earlier in the week, falling to a weakest level of R6.95 to the dollar on news that Italy could be in danger of default – from R6.68 a week ago. It recovered and was bid at R6.8589 yesterday afternoon.
The rand is supported by firm commodity prices. Platinum, South Africa’s biggest export, traded yesterday at $1 777 an ounce from $1 722 a week ago.
However, the prices of oil imports are also rising. Josina Oliphant, a commodities analyst at RMB, said oil prices were back above the levels seen before the International Energy Agency announced at the end of June it would release 2 million additional barrels of oil a day, over 30 days.
Brent crude fell from about $114 a barrel to $105 on the news. It subsequently recovered and traded yesterday at about $118.
The JSE ended lower, with the all share at 32 203.94 points, from the previous day’s close of 32 310. page 2