Traders target $2,500 high for bullion

Investors and strategists were already targeting a gold price above $1,800 mere hours after the precious metal surged past $1,700 a troy ounce for the first time.

Gold touched a new nominal record of $1,716.19 a troy ounce on Monday in the wake of the downgrade of the US government’s credit rating by Standard & Poor’s over the weekend.

But strategists were already looking to the next milestone.

JPMorgan encapsulated the bullish sentiment in the gold market, predicting that bullion could hit $2,500 by the end of the year.

That would surpass gold’s inflation-adjusted high, touched in 1980, which translates to just under $2,500 in today’s money.

“Before the downgrade, our view was that cash gold could average $1,800 per ounce by year end,” said Colin Fenton, JPMorgan’s head of commodities research, in a note to clients. “This view will likely now prove to be too conservative: spot gold could drive to $2,500 per ounce or higher, albeit on very high volatility.”

Goldman Sachs revised up its gold price forecasts to predict that the metal would trade at $1,860 in 12 months’ time, although it predicted a fall back to $1,645 over the next three months.

Investors have already started betting on a further sharp rise in the gold price over the coming months with traders reporting strong interest in call options – which give investors the right but not the obligation to buy a futures contract at a designated price – at $1,800 for October and $2,000 for December.

Some gold bulls are starting to draw comparisons with the 1970s when a similar confluence of bullish factors drove the gold price to $850 an ounce, a record which, adjusted for inflation, still stands.

“The level of anxiety and the lack of confidence in institutions, private or governmental, is similar to previous periods of elevated risk – and that is when gold shines,” said James Steel, precious metals strategist at HSBC in New York.

Gold prices have been fuelled by growing fears of sovereign debt defaults and expectations of further monetary easing.

Meanwhile, investors have been deterred from putting funds into other haven favourites, the Swiss franc and Japanese yen, after recent moves by the two countries’ central banks to curb the appreciation of their currencies.

Goldman Sachs said the gold price had failed to keep pace with the “collapse” in US inflation-adjusted interest rates.

That suggests, the bank’s commodity strategists said, that “gold positioning remains ‘under-bought’”.

The bank, which has the largest commodity division among investment banks by revenues, revised its earlier expectation that gold prices would peak next year.

“US economic growth has been slower, and real rates lower, than previously anticipated,” Goldman said. “We now expect US real interest rates will remain lower for longer.”

Silver was also helped by haven buying, rising 2.9 per cent to $39.47 a troy ounce, but platinum and palladium remained under pressure.

Indeed, the gold price rose above the platinum price for the first time since a brief spell in late 2008. Before then, the last time the yellow metal traded above platinum was in 1996.