Gold hits record as debt worries mount, Thailand buys

LONDON: Gold hit a second successive record high on Wednesday, driven by deepening fears over the spread of the European debt crisis and its impact on regional growth, while data showed a number of central banks including Thailand bought gold in June.

The United States managed to avert an unprecedented debt default on Tuesday after lawmakers agreed to raise the country's borrowing limit. But, the focus turned to credit ratings agencies, which have warned the country could lose its top-notch rating as its finances remain fragile.

The nervousness over the US economy was compounded by the latest developments in Europe, where Italian bond yields rose to their highest in over a decade above 6 percent, a level widely viewed as unsustainable, adding to the lure of gold as a safe-haven investment.

Meanwhile, the International Monetary Fund's monthly report on central bank reserves showed Thailand, Russia and Kazakhstan, among others, added to their holdings of gold two months ago, prolonging the trend in the official sector to put more of their reserves into bullion rather than hard currencies.

Spot gold was last quoted at $1,670 an ounce, up 0.6 percent on the day at 0855 GMT, having hit a record $1,672.65 earlier. US gold futures were last up 1.7 percent at $1,672.40 an ounce.

"If you look at the European bond markets, you will see yields on Italian and Spanish bonds are back above 6 percent, so this crisis, unfortunately, seems to be spreading to Italy and Spain, which is also potentially more serious than Greece, because they're much larger," said Jesper Dannesboe, senior commodities strategist at Societe Generale.

"Gold is reacting to this and that is the main driver right now," he said.

Further unnerving the financial markets was the Swiss National Bank's decision to cut rates to fight the strength of the currency , which set the price of gold in Swiss francs on course for its biggest one-day gain since May.

THAILAND BUYS

The IMF data showed Thailand boosted its gold reserves for the third time in the last year, by 18.66 tonnes in June to 127.524 tonnes. Korea said earlier this week it bought gold for the first time in over 10 years in June and July.

Gold is set for a 17 percent gain in 2011, which would mark an eleventh successive year of price rises.

This increase has been driven largely by the US Federal Reserve's ultra-low monetary policy and concern that slow growth and the burden to the economy from the country's debt could derail the recovery process of the last two years.

Gold is on course for its strongest quarterly performance since the second quarter of last year.

Holdings of gold in exchange-traded products rose for an eighth day, to their highest level this year, after an inflow of more than half a million ounces into the world's largest bullion-backed ETF, the SPDR Gold Trust , which is now showing a net inflow for the year for the first time.

"The lack of a decent gold pullback has left many investors feeling frustrated and patience for a better buying opportunity is now wearing quite thin, which is why gold has attracted very decent buying this week," said UBS strategist Edel Tully in a note, adding the size of the speculative position in US gold futures posed a downside risk to gold.

"But given that these are not ordinary times, ordinary rules do not apply," she said, adding that the bank had raised its three-month price forecast to $1,850, from $1,600.

In other precious metals, silver hovered near three month highs, trading 0.8 percent higher on the day at $41.15 an ounce, while platinum and palladium were almost flat.

Spot platinum was last up 0.1 percent at $1,794.00 an ounce, while palladium was flat at $822.25 an ounce.

Copyright Reuters, 2011