Capital Gold Group Report: Gold Prices Break $1,250 - New Historical High

NEW YORK (The Street) --  Gold prices set a record high Tuesday as investors scrambled to buy the precious metal and risk appetite diminished.

Gold for August delivery was adding $4.90 to $1,245.70 an ounce at the Comex division of the New York Mercantile Exchange after reaching an all-time high of $1,254.50. The gold price today has also traded as low as $1,238.50. The U.S. Dollar Index was slipping slightly to $88.26 while the euro rallied 0.23% to $1.19 vs. the dollar. The spot gold price Tuesday was rising $3, according to Kitco's gold index.

The risk trade was deteriorating fast, and investors fled into gold as a safe haven asset.  Fitch ratings agency said that the U.K. is up against a "formidable" task to cut its budget deficit, and the news spooked investors and pushed gold past its old high of $1,249 an ounce.

"I think gold is smelling that these lows that we've held in the past few weeks in the equity markets are not going to hold and if they don't gold will make that move towards that $1,300 or higher an ounce in the near term," says Scott Redler, chief strategic officer at T3Live.com.

In times of financial turmoil and currency devaluation gold becomes the ultimate safe haven. A double digits rise in gold prices, like investors saw on Monday, represents a flood of fear in the markets. The euro rebounded modestly from its 4-year low of $1.18 but many analysts are looking at $1.16 as the next support area. As traders and hedge funds pile into gold and prices start moving fast and furious, many retail investors will jump into the trade for fear of missing the boat.

There are several supporting factors that help move the gold price such as peer pressure and central bank buying.

Scott Carter, executive vice president of Goldline International, a 50-year-old seller of precious metals, says "when there's a spike in the price of gold, it's somewhat counterintuitive, but you see buyers increase into the markets. So it's almost like the train is leaving the station ... if gold goes up 1%, 2% in a day we'll see a dramatic increase in the interest."

Another popular theory for strong gold price movement is central bank buying. Since the second quarter of 2009, central banks from emerging market countries like India and China have been reallocating their reserves with a strong push into gold. India and China hold 6% and 1.5% respectively as compared to the U.S. which holds 74% of its reserves in gold. Recently Iran joined this trend announcing it would sell 45 billion euros for U.S. dollars and gold.

Central banks typically never announce when they are buying gold for fear of moving the price higher but when they buy they typically purchase in large quantities and could be a possible factor in big price swings.

 

 

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