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Gold hits new high as European debt woes rise

September 7, 2010 |  1:38 pm

Gold closed at a record high Tuesday, surpassing its previous peak reached in June, as fears of new financial-system trouble in Europe triggered another flight to what investors perceive to be safe.

October gold futures in New York rose $8.10 to end at $1,257.90 an ounce, topping the closing high of $1,257.20 set June 18.

The day’s advance lifted gold’s year-to-date gain to 14.8%.

By contrast, the Dow Jones industrial average slid back into the red for the year, falling 107.24 points, or 1%, to 10,340.69. The Dow is off 0.8% since Dec. 31.

Europe’s government-debt crisis, which pummeled global markets in spring, is the gift that keeps on giving to gold and to other classic havens, including U.S. Treasury bonds.

Goldbars The Wall Street Journal reported Tuesday that Europe’s recent “stress test” of its biggest banks understated some lenders’ holdings of bonds of the continent’s financially challenged states, including Greece and Spain.

That might not have bothered investors except that those bonds, in many cases, have been falling in value again in recent weeks, driving yields sharply higher.

The yield on 10-year Irish government bonds jumped to 5.98% on Tuesday, up from 5.76% on Monday and surpassing the previous peak of 5.86% reached in May, at the zenith of the spring debt concerns triggered by Greece’s crumbled finances.

Investors dumped Irish bonds Tuesday in part because of new worries over the potential cost of the government’s bailout of its major banks. Yields also jumped on Greek and Portuguese bonds.

Despite the massive financial backstop the European Union and the European Central Bank announced in May for struggling governments, “The underlying solvency issue has not gone away,” said Marc Chandler, currency strategist at Brown Bros. Harriman & Co. in New York.

The market took no solace from the EU’s announcement that it agreed to create a new supervisory board over the financial industry and that it would require more disclosure of data on member states’ budget situations.

The euro currency was slammed as debt jitters revived. The euro fell 1.4% to $1.269 from $1.288 on Monday. Meanwhile, the dollar is having its own problems: The buck slid to a new 15-year low against the Japanese yen, to 83.77 yen from 84.21 on Monday.

So gold got the chance to star again as the alternative to weak paper currencies. The metal also plays to investors' lack of conviction about the economic outlook.

“There’s all sorts of uncertainty surrounding not only Europe but currencies in general and the whole global economic situation,” said Bill O’Neill, a partner at commodities trader Logic Advisors in Upper Saddle River, N.J.

He thinks gold is headed for $1,300 in the next few months. Besides the continuing demand for bullion from nervous investors worldwide, demand from Indian jewelry buyers is typically strong at this time of year ahead of that country’s festival season in October and November, O’Neill noted.

-- Tom Petruno

Photo credit: Chris Ratcliffe / Bloomberg News