Gold prices hit a record high of $1,718 an ounce in intraday trading yesterday (Monday) in response to Standard & Poor's downgrade of the U.S. credit rating, and the continuing drumbeat of dreary global economic news will keep pushing the yellow metal higher.
In fact, Money Morning Contributing Editor Peter Krauth reiterated his belief that gold prices will more than double from current levels.
"I expect gold to reach $5,000 before this bull market peaks," Krauth said. "I'm very open to the possibility that gold could correct from here, but I'd expect that to be nothing more than a short-term pullback."
Following through on a months-long threat, S&P cut the U.S credit rating to AA+ from AAA late Friday, sending global stock markets tumbling and a flood of investors to one of the few safe havens available – gold.
"The S&P downgrade adds to concerns that investors have in the safety of U.S.- issued debt," Krauth said, pointing out that Treasuries are "considered to be the safest in the world because of their previously unblemished AAA rating and their liquidity. When doubt is cast on such an important and ubiquitous investment instrument, it's no surprise that gold, a traditional safe haven dating back millennia, is going to be a beneficiary."
Although it had already risen 15% for the year as of Friday, the appeal of gold remains high among investors worried about sovereign debt problems in the United States and Europe, as well as a U.S. recovery that looks like it may tip into a double-dip recession.
"The surge in gold is a knee-jerk reaction to the downgrade and could prompt profit-taking, but concerns of slowing economic activity in the U.S. and the lack of concise action to tame its debt levels will likely see more diversification from U.S. assets, boosting demand for the ultimate safe haven," FastMarkets analyst James Moore told the Wall Street Journal.
Gold on the Comex division of the New York Mercantile Exchange soared $66.40, a 4% pop, in overnight electronic trading Sunday night to a record $1,718.20 an ounce. After slipping below $1,700 in the morning, S&P's follow-up announcement that it had also downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac drove gold to $1,715.50 by 4 p.m.
Yet gold remains well below its inflation-adjusted peak set in 1980, when it sold for $850 an ounce – the equivalent of about $2,400 an ounce today.