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Gold Breaks $1,700 on U.S. Credit Downgrade

Release Date: 
Monday, August 8, 2011

August 8, 2011

The price of gold rose more than $41.00 per ounce in trading on Monday morning in response to Friday's S&P downgrade of U.S.'s credit rating. The metal moved above $1,700 for the first time, reaching record levels and trading at $1705.40 per ounce at 8:16 a.m. Pacific Time on the New York Spot Market.

The impact of the downgrade is still unclear although several economists indicated it could significantly worsen the economy. Economists at Goldman Sachs now see a 1-in-3 chance of a second U.S. recession. "The U.S. and global economy are in a feeble ‘rehab' recovery and a trifecta of shocks has hit the economy - surging oil prices, the Japan disruption and the debt crises in Europe and the U.S," wrote Ethan Harris, a Bank of America Merrill Lynch economist. The downgrade could potentially be "the 'straw that breaks the camel's back,' " he said.

"We are so much more reliant now on what our macroeconomists are telling us. They had a view that we wouldn't be moving back into recession and that growth would accelerate into next year, but events are changing quite quickly," said Deutsche Bank analyst Michael Lewis. "The main beneficiary will continue to be gold," he added.

"In this current macro environment with high risk and uncertainty surrounding the financial markets, gold has boded very well," said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland."Gold is pricing in the one-notch downgrade as well as a component of lower global GDP growth."

Gold has become another currency, noted George Gero, vice president at RBC Global Futures. "Investors have been concentrating on acquiring an asset that preserves purchasing power."

"There is heavy buying in gold because of the uncertainty surrounding the U.S. economy," Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a phone interview."For gold, the sky is the limit."

(Sources:  “Gold Breaks $1,700," Wall Street Journal, August 8, 2011; "Gold price tops $1,700 as investors seek refuge," CNBC, August 8, 2011; "PRECIOUS-Gold hits record over $1,715/oz as risk assets slip," Reuters, August 8, 2011; "Gold Tops $1,700 for First Time on U.S. Rating," Bloomberg, August 8, 2011)

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