Gold soars to record high after Indian purchase

And goldbugs say the price could double as the world economy returns to growth

FIRST POSTED NOVEMBER 5, 2009

The price of gold has continued its remarkable rise, hitting a new all-time high yesterday of $1,097.72 an ounce before falling back today to $1,086.75 in London.

The precious metal is riding high because of a weak dollar - the currency in which it is priced - and its status as a safe investment in troubled financial times. But yesterday the gold price received a further boost when the International Monetary Fund revealed it had sold 200 tonnes of its own reserves to the Indian central bank.

India's purchase was made last month at $1,045 an ounce, and almost doubled the country's total gold reserves to 558 tonnes. The price of gold was also supported by the US Federal Reserve's announcement that it intends to keep interest rates low for an "extended period".

Indian finance minister Pranab Mukherjee denied that his country had lost faith in the US dollar as a reserve currency. However, a policy of diversification seems sensible given that the greater part of India's $285bn of reserves is held in US Treasury bills.

Despite the record highs and today's dip, 'goldbugs' claim the price of the precious metal can only increase even further. Barclays Capital predict gold could hit $1,500 an ounce, while Aaron Smith, managing director of Superfund Financial (Singapore) Pte, has forecast that massive inflation caused by the world economy's return to growth could see a high of $2,000 an ounce in the next three years.

There have long been rumblings of discontent emanating from Russia, the Arabian Gulf oil states and India's rival emerging superpower China at the falling value of the US dollar - and talk of converting dollar reserves into euros. Underlining concerns, the dollar fell once more against the euro yesterday, continuing the downward trend of the past few months.

With India's purchase giving the price of gold new momentum, it seems the metal is in the ascendancy as a reserve asset. However, the United States can at least take comfort from the fact that India chose to buy gold rather than euros.