Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the "currency of last resort".
Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around US$1700 ($2914) a troy ounce to US$1460 last week.
The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.
It gained another 4 per cent to US$1618 on Tuesday helped by the recommendation from Goldman Sachs, which said gold was at an inflection point and could hit US$1800 over the next 12 months. The record high for gold is US$1900, reached in 2011.
"We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policymakers act to accommodate shocks such as the one being experienced now," said Jeffrey Currie, head of commodities at the Wall Street bank.
As well as being seen as a hedge against all kinds of market volatility, gold is viewed by many investors as a way to protect themselves from the debasement of currencies and also inflation.
"It's just like in 2008 and 2009 when governments and central banks turned the printing press on full speed," said John Ciampaglia, chief executive of Sprott Asset Management.
Traders said gold has also been boosted by a weaker US dollar and other measures taken by the Fed — in particular the opening of swap lines with other central banks to boost the availability of dollars in the financial system. A weaker dollar is thought to be positive for gold because it lowers the cost of buying the metal for the holders of other currencies.
"The opening up of the swap lines, which may or may not curb the dollar rally, has at least made the US currency move available," said James Steel, precious metals analyst at HSBC in New York.
While interest rates were likely to be kept at close to zero, governments were likely to use fiscal policy to "drive inflation back towards targets," said Jim Luke, a fund manager at Schroders who views rising consumer prices as a positive for gold.
"Fiscal policy can take various forms and we do not rule out direct 'helicopter money' type interventions at all. As such, we could not imagine a more bullish environment for gold prices," he said.
However, Nicky Shiels, an analyst at Scotiabank, said investors needed to be wary because physical demand was likely to remain subdued with parts of India in lockdown. "In addition, oil-sensitive emerging market central banks are likely to lower their pace of gold purchases."
The strains caused by recent volatility in the gold market were also evident on Tuesday with the cash price of gold trading at a US$23 discount to the future prices on the Comex exchange in New York.
While there is no shortage of physical gold, traders said a lot of it was in the wrong location or the wrong form.
The London Bullion Market Association said on Tuesday that there had been some impact on liquidity arising from price volatility in Comex 100-ounce futures contracts.
"LBMA has offered its support to CME Group to facilitate physical delivery in New York and is working closely with Comex and other key stakeholders to ensure the efficient running of the global gold market," it said.
Written by: Neil Hume and Henry Sanderson
© Financial Times