July 18, 2011 / 2:46 AM / 6 years ago

Gold extends record rally, jumps above $1,600

<p>An employee of a bullion house shows gold bars in Mumbai December 3, 2009.Arko Datta</p>

NEW YORK (Reuters) - Gold surged to an all-time high above $1,600 (999 pounds) an ounce on Monday, extending a record rally as investors sought a safe haven on fears that U.S. lawmakers could fail to raise the debt limit, resulting in a default.

Gold rallied even as the U.S. dollar strengthened, helping the precious metal hit record highs across a number of major currencies, namely euro, sterling, South African rand and the Canadian dollar.

The latest rally, which began three weeks ago on euro zone debt worries, has powered gold into uncharted territory. Europe has been struggling to put together a second bailout for Greece and contain its debt crisis.

Bullion has gained 8 percent in 11 days as President Barack Obama and Congress have failed to reach an agreement to raise the $14.3 trillion U.S. borrowing limit. With the clock ticking towards an August 2 deadline, investors have turned to gold at the expense of riskier assets such as equities and commodities.

"What's coming out of these debt talks is that you are seeing a lot of people focussing on the numbers and understand the ramifications of debt burden on countries. Governments are at a very precarious situation which is not easy to rein in," said Robert Lutts, chief investment officer of Cabot Money Management, which manages over $500 million in assets.

Spot gold rose as high as $1,607.01 an ounce and was up 0.8 percent at $1,605.30 an ounce by 11:08 a.m. EDT (4:08 p.m. British time). It has now set record highs in three out of the last four sessions.

U.S. gold futures for August delivery were up $16.40 an ounce at $1,606.40.

Adjusted for inflation, gold's all-time high was above $2,300 an ounce set in 1980.

Silver soared nearly 4 percent, topping $40 an ounce for the first time since early May. Silver hit a two-month high of $40.70 an ounce and was up 3.5 percent at $40.64 an ounce.

Silver has rallied more than 15 percent in the last two weeks. The metal, which has a strong industrial demand component, rallied to a record $49.51 an ounce in April before correcting sharply.

DEBT FEARS WEAKEN CURRENCIES

Gold prices briefly backed off from the $1,600 an ounce level after U.S. Treasury Secretary Tim Geithner expressed confidence that Congress would raise the debt ceiling and said Republicans had taken "default off the table."

Geithner's comment, however, was not enough to stem losses in equities and commodities, with the S&P 500 .SPX down over 1 percent and the Reuters/Jefferies CRB commodity index .CRB 1 percent lower, led by sharp losses in crude oil futures.

With five days until President Barack Obama's deadline for a deal to raise the U.S. debt ceiling, two ratings agencies already have warned of a credit rating downgrade in the event of a U.S. default.

Market watchers fear such a move could send interest rates soaring and erode the U.S. dollar's reserve currency status, which would be a huge boost for gold. With Europe facing a debt crisis too, many investors view gold as safer than either the dollar or the euro.

"Investors are increasingly looking to gold as a safe haven as the U.S. dollar, pound sterling and the euro continue to devalue against stronger currencies such as those of Canada, Australia, Norway and Switzerland," said Angelos Damaskos, chief executive of Sector Investment Managers.

Additional reporting by Jan Harvey in London; Editing by David Gregorio

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