Gold price hits record as investors shy away from euro

Metals like gold and silver have become a core holding for more investors as they focus on the risks that lie in sovereign balance sheets. The gold price was as high as $1,245.80 per ounce Wednesday.

Gold surged to a record price on Wednesday, as investors rushed to hedge against possible erosion in key currencies such as the euro.

The metal has gained as a debt crisis in Europe has pushed the euro down by nearly 8 percent in the past month against the US dollar. Although strength in the dollar is often bad for gold, many investors are wary of America's fast-rising public debt, as well as Europe's.

"Gold prices are soaring because of growing inflation fears," Peter Morici, a University of Maryland economist, wrote in a report Wednesday. "Both the European Central Bank and the Federal Reserve seem to be on the path to permanently easy money with the Greek bailout and huge US budget deficits."

Gold may not quite be the "new black" in fashion, but it has reasserted itself this week as the most basic currency unit known to the world.

It's a haven in times of financial or geopolitical crisis. The US dollar also vies for that role, and in the past year, economists speculated that the euro would rival the dollar as a reserve currency. But now, with investors focusing on the risks that lie in sovereign balance sheets, metals like gold and silver have become a core holding for more investors.

Gold traded as high as $1,245.80 per ounce Wednesday, and contracts for June delivery settled at $1,243.10 an ounce, according to financial news services.

Some metals analysts predict a continued rise in gold, while others say the metal is near a peak.

In the more bullish camp, analysts at Bank of America Merrill Lynch see gold hitting $1,500 an ounce by late 2011.

A more pessimistic view comes from Capital Economics in Toronto, which predicts gold will drop below $1,000 an ounce by the end of this year.

Much of the debate centers around the economy and inflation. A strong economic recovery could buoy commodities in general, including gold. (Merrill Lynch sees oil going above $100 a barrel next year.) Inflation, by eroding the purchasing power of a currency, can send investors fleeing to gold or other hard assets.

Financial markets' recent focus on the Greek debt crisis – and Europe's scramble to create a rescue package – can cut both ways on these issues.

On the side of deflation or economic weakness, the aid for Greece and other debt-entangled nations in Europe will come with strings attached. They'll have to pare down on government spending and possibly raise taxes, which could dampen Europe's already-slow economic recovery.

On the other side, the recession and financial crisis have prompted governments around the world to take costly measures to shore up private-sector banks and consumers. The Greek rescue is only the latest example. The bad impacts on traditional currencies could include inflation, sovereign default or currency devaluation, or a rising "moral hazard" that banks or bailed-out eurozone governments will take more risks.

The Greek bailout includes help from the European Central Bank, raising concern that its hawkish stance against inflation may be weakened.

While not issuing a gold forecast, economic analysts at Morgan Stanley argued Wednesday that commodity prices and global inflation will probably rise.

"The big emergency fund ... creates moral hazard because profligate governments can now be sure that they will be bailed out at below-market interest rates eventually," the economists write. Europe's sovereign crisis "also implies that the Fed will probably keep interest rates at record-low levels for longer."

Related:

• Europe's $955 billion rescue package, Greek austerity, and moral hazard
• Blog: EU rescue plan buys time to defuse Greek debt crisis
• Why Greek debt 'contagion' is roiling global stock prices
• US budget deficit: Finding solutions