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Wednesday, December 2, 2009

Gold hits yet another record high

The price of gold has struck yet another record high as the dollar continues to weaken.

Renewed vigour in early trading in London pushed gold to a new high of $1,217.23 an ounce. It has hit a number of new highs in recent weeks.

Other precious metals have also rallied strongly. Silver, at $19 dollars an ounce, is 5% off its all-time high.

Demand for gold is being driven by two main factors - a weak dollar and investors' appetite for safe assets.

The price of gold is not just at a record in dollar terms, but in yen, euro and sterling terms too.

Three golden rules

Gold is a commodity that investors rush to in times of uncertainty - what is often referred to as a flight to safety. This week, investors pulled their money from shares after Dubai World reignited fears about bank lending by calling for an extension on its debt repayments.

Investors with large dollar holdings - including countries' central banks - have focused on gold as a safe investment.

Michael Hewson, an analyst at CMC Markets, said central banks in China, Russia and India had all looked to protect themselves against economic uncertainty.

"It is a store of value while investors have serious doubts about the global financial system - it's something that is not going to lose its value like a currency," he said.

Another key reason behind the sharp increase in the gold price is the fall in the value of the dollar. The US has said it will maintain low interest rates for some time, which makes the dollar less attractive to investors.

The dollar has fallen by 14% against the pound this year, and by 8% against the euro.

The third reason for the rise is speculation - as the price of gold keeps rising, more investors bet that the price will keep going up.

"Pressure remains on the dollar," said Peter Fertig at Quantitative Commodity Research.

"A weaker dollar is the main driver for gold, alongside speculation that central banks may buy more."