USA Credit Downgraded Causes Rise in Gold Prices
Gold prices rallied to a record high $1,497.20 an ounce on Monday after Standard & Poor's downgraded its credit outlook for the United States and as investors worried about debt in the euro zone and inflation in China.
S&P said it might eventually cut its long-term rating on the United States within two years, prompting investors to buy gold as a hedge against economic uncertainty. The ratings agency cited a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit.
The CBOE gold volatility index .GVZ, a bullion market fear gauge, surged to its highest level in four months, up 8 percent for its biggest one-day rise since March 1.
"It's a wake up call that we need to do something in the U.S. Unfortunately, the political dynamics are unlikely to dictate that. Gold is going to benefit for an extended period, meaning that we are not going to resolve those issues," said Axel Merk, portfolio manager of Merk Hard Currency Fund (MERKX.O)
Spot gold rose 0.8 percent at $1,495.20 an ounce by 2:52 p.m. EDT (1852 GMT), its fourth session of gains.
U.S. gold futures for June delivery settled up $6.90 an ounce at $1,492.90, with volume approaching a busy 200,000 lots, preliminary Reuters data showed.
Gold rose even as the Reuters/Jefferies CRB index .CRB fell 1 percent, led by a more than 2 percent drop in U.S. crude futures. Global equity markets also tumbled.
"The U.S. debt situation got a reality check this morning from the move by S&P," said John Kilduff, a partner at Again Capital in New York.
"Only precious metals will be seen as attractive in the aftermath of the outlook downgrade. The overall economic outlook becomes more opaque with this; equities and energies will be very much under pressure now," Kilduff said.
Gold prices were also underpinned after Atlanta Federal Reserve President Dennis Lockhart said economic growth may have been slower than expected early this year. Investors took this as an indication that the Fed is not likely to rush to scale back its vast support for the economy.
Bullion prices have almost doubled since the Fed cut interest rates to the bone in 2008 to boost economic growth.