Gold Prices Surge and Will Keep Climbing as Investors Protect Against European Debt Crisis

Gold prices yesterday (Wednesday) broke through to a record high, as investors feared the Eurozone bailout plan would debase the euro and escalate inflation.

Gold for June delivery continued its record-breaking Tuesday climb to hit $1,243.10 an ounce Wednesday. The contract reached an intraday high of $1,249.20 an ounce. Spot gold prices hit $1,244.45 an ounce, up almost 20% in the past three months.

Gold's reputation as a "safe haven" investment causes the metal's price to move inversely to investor confidence, which has been rattled by the Greece debt crisis and last week's 1000-point plunge in the Dow Jones Industrial Average.

Gold priced in euros hit a record 988.31 on Wednesday, outpacing dollar gold's rise.

"Clearly, the largest move has taken place in euros," Nic Brown, an analyst at Natixis, told Reuters. "For me, this is a classic illustration of gold being a store of value in times of crisis."

The $1 trillion bailout package announced by the European Union Monday has done little to allay fears that a sovereign debt crisis will spread to Europe and the United States.

"I think the package crystallizes some of the longer-term risks," Michael Jansen, an analyst with JPMorgan Chase & Co. (NYSE: JPM), told The Wall Street Journal. "For the European Central Bank to monetize the debt of Greece is a huge worry for a number of people."

The European Central Bank (ECB) started buying government bonds as part of the European Union (EU) Greece rescue strategy, and investors are concerned this will lead to a debasement of the euro and rising inflation. ECB president Jean-Claude Trichet insists the central bank "will not turn on the printing press" and will drain the excess cash created by bond buying.

But Swedish bank SEB said the bailout plan spreads the problem around instead of containing it, threatening the euro's long-term stability.

"Debt is fought by more debt in other places, putting the euro, and in the longer run most western currencies, under fire. In this environment investors rush for gold," the bank said in a report Wednesday.

Gold also rallied 2% during last week's "flash crash" amidst investor panic and a rapid stock sell-off.

Since May 2008, gold's spot price has gone up 43%. Money Morning Contributing Editor Peter Krauth predicted soaring gold prices and sees no end in sight to the continuing price surge.

"As long as considerable uncertainty surrounds the Eurozone bailout, gold will remain strong," he said. "Let's be clear: Europe is just throwing paper money they don't have, so they'll have to print at Greece, and probably also at Ireland, Portugal, Spain, and Italy. That will be highly inflationary."

The European aid announcement bolstered global markets Monday, but gains have been moderate since.

"I like to think that uninformed investors pushed up stocks on Monday, thinking this was a panacea, and informed investors pushed up gold and gold stocks on Tuesday, as they know the real effects," Krauth said.

Krauth believes gold bears have fewer arguments against a continuing price surge as it is so strongly linked to the Eurozone's actions.

"What could derail gold demand in the next few weeks is if European bankers and political leaders came to their senses, and allowed Greece's debt to be restructured," he said."But that would mean all sorts of large European banks and institutional investors would have to take a big hit on their Greek bonds. There's about as much chance of that as there is for "PIIGS" to fly. Besides, gold often moves opposite to the U.S. dollar. Lately, they've both been rising together, so even that hasn't stopped gold. Gold investors should feel pretty confident."

The gold rise is giving investors other options besides the "yellow metal" - prices of silver and palladium were also up Wednesday.

"The one other metal I'd urge investors to own is silver," said Krauth. "It is volatile, but can seriously outpace gold's gains. It's also relatively cheap compared to gold on a historical basis."

Silver for July delivery gained 1.9% to $19.67 an ounce.

Gold exchange-traded funds hit their biggest inflows in over a year. The SPDR Gold Trust (NYSE: GLD) has climbed 5.2% this year and is up 34% since May 2009.

Analysts are targeting gold to hit $1,250 and some are even predicting a 2010 height of $1,500. But Krauth has a different idea.

"I expect gold to eventually reach $5,000 an ounce. It's still much too cheap right now."

[Editor's Note: For a related analysis -- which explains how the Eurozone bailout plan turned gold into a "must-have" investment -- check out a defensive-investing-strategies story that also appears in today's issue of Money Morning. To access that story, please click here.]

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