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Government debt fears drive more investors into gold and silver

April 18, 2011 |  5:02 pm

Gold and silver marched to new highs Monday, benefiting from Standard & Poor’s warning about America’s credit rating and from more turmoil in Europe’s government-debt markets.

April gold futures in New York rose $7 to $1,492.30 an ounce, an all-time high (unadjusted for inflation). The metal traded as high as $1,497.30 before falling back.

Silver futures rallied 39 cents to $42.96 an ounce, the highest since the spike of late 1979 and early 1980, when the Hunt brothers briefly cornered the market.

Silverbars Gold now is up 5% year to date. It has been far outrun by silver -- the “poor man’s gold” -- which is up 39%.

Investors have been pouring into the metals this year in part on fears that the dollar could be headed for a meltdown, given U.S. fiscal policy and the Fed’s money-printing campaign.

Standard & Poor’s stoked those concerns by changing its outlook on the nation’s AAA credit rating to “negative” from “stable,” citing the risk that significant progress wouldn’t be made to pare record budget deficits.

But the dollar, which has mostly been sliding since early January, got a reprieve on Monday: Europe’s debt woes trumped pessimism about the buck, and the U.S. currency returned to its role as a haven in times of global trouble, competing directly with the precious metals.

The DXY index, which tracks the dollar’s value against six other major currencies, jumped 0.9% to 75.48, after hitting a 16-month low late last week.

The euro was the day’s big loser, tumbling 1.4%, to $1.423 from $1.443 on Friday.

Yields on Greek, Irish, Portuguese and Spanish government bonds rocketed Monday on growing speculation that Greece will have no choice but to default on its debts. Also, an election victory Sunday by an anti-euro party in Finland raised the possibility that the Finnish government would block the European Union’s planned bailout of Portugal, leading to more financial chaos on the continent.

Anything that raises doubts about the wisdom of holding paper securities bolsters the case for gold and silver.

Still, if financial markets were to suffer a major new breakdown, that could come back to haunt the metals: If plummeting markets pushed the global economy back toward recession and deflation, one result might be sinking demand for all commodities -- exactly what happened in the fall of 2008.

-- Tom Petruno

Photo: Austrian silver bars. Credit: Lisi Niesner / Reuters