Gold (GC-FT1,212.10-0.90-0.07%) hit a record high over $1,225 an ounce on Thursday, exerting an irresistible pull on investors seeking an alternative to the dollar, despite a Chinese central bank official warning against a potential asset price bubble.
Gold has risen by more than 7 per cent since touching a low of $1,136.80 last Friday on now-waning fears that the Middle Eastern emirate Dubai might default on its debt, which spurred investors to sell the metal to raise cash to cover losses.
Spot gold rose as high as $1,226.10 per ounce before slipping to $1,1218.90 by 0826 GMT, still up $3 from New York's notional close.
U.S. gold futures for February delivery touched an all-time high of $1,227.50.
Expectations for some central banks, especially China's, to diversify reserves into gold are also a key driving factor, particularly after India last month bought about half the 403.3 tonnes of gold the International Monetary Fund planned to sell.
But gold prices are high and markets should be careful of a potential asset bubble forming, Hu Xiaolian, a vice-governor of the People's Bank of China, said on Wednesday.
“We must watch out for bubbles forming on certain assets, and be careful in those areas,” Mr. Hu said in Taipei.
Another Chinese official also emphasized the long view.
Zhang Bingnan, a senior official of the China Gold Association, said there was more scope for China to step up gold purchases, but only over the long term, and not in the open market, adding that he was voicing a strictly personal view.
China's more than $2-trillion in foreign exchange reserves are mostly parked in U.S. treasuries, despite calls from some in China to invest the reserves in oil and other natural resources that the fast-growing Chinese economy will need in future.
Analysts say the dollar's persistent weakness has come to the fore, pushing lingering worries about Dubai's loan payment problems to the backburner.
“The persistent view that the dollar will remain weak stems from moves to review dollar-based assets and the belief that interest rates will be stuck at low levels, and these are factors that remain unchanged,” Shuji Sugata, a manager at Mitsubishi Corp Futures, said.
The market forces that have driven gold above $1,200 an ounce are still largely in place, but the current rally must lose momentum at some point, Richard O'Brien, chief executive officer of Newmont Mining, said on Wednesday.
“We're going to run out of gas at some point, but I don't think that means we're going to suffer lower gold prices for very long,” Mr. O'Brien told Reuters in an interview.
Fundamentals boosting gold include a steady decline in global production, which he expected to continue in the years ahead.
Gold, which has risen 25 per cent in the last three months, reached record highs in euro and sterling terms on Thursday, Reuters data show, indicating independent gold strength.
Gold denominated in yen, Swiss francs, euros, pounds and Australian dollars is seeing returns of between 15 and 22 per cent over the last three months.
“Gold is being viewed as one of the primary alternatives to holding paper currency and the gold price has become a key barometer of investor confidence in government policies,” said Nigel Phelan, director of ETF Securities in Australia and New Zealand.
