CRISISBOOM

thestreet.com

NEW YORK (TheStreet ) — Gold prices hit record highs Tuesday as the Bank of Korea bought more gold and as the Senate passed the debt ceiling deal.

Gold for December delivery popped $22.80 to close at $1,644.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,646.80 and as low as $1,618.80 while the spot gold price was skyrocketing almost $30, according to Kitco’s gold index.

Silver prices added 78 cents to close at $40.09 an ounce. The U.S. dollar index was up 0.22% at $74.48 while the euro was down 0.36% vs. the dollar.

With the debt-ceiling issue basically behind U.S. markets, investors are now looking at the health of the economy and the picture isn’t bright. Worries of slowing global growth were the main factors boosting gold prices.

Not only have quarterly growth numbers been anemic and July’s manufacturing index was barely above the critical 50 growth-mark, but the debt plan aims to slash spending by $2.5 trillion in the next 10 years, making it even harder for the U.S. economy to grow. The lingering risk of a downgrade of America’s credit rating was also a factor as the major U.S. equity indexes were all losing more than 1% in late trades.

Beyond the safe-haven appeal of the yellow metal on a down day for stocks, Bank of Korea announced it has bought 25 tons of gold over the past two months. The stake is valued at $1.24 billion, or roughly $1,550 an ounce, and it marks the country’s first gold purchase since 1998. Central banks tend to buy gold when they need to diversify or increase their holdings as mandated by the government and are not necessarily market timers, but they do buy as a long-term investment.

The purchase brings Korea’s total gold holdings to almost 40 tons, still a fraction of the bank’s total reserves compared to the U.S. or Portugal, which hold 74% and 84% of their reserves in gold, respectively, according to the World Gold Council.

The news does underscore the fact that central banks have become net buyers of gold, however, adding a huge floor under the gold market and reminding investors that countries are purchasing large quantities. Official sector buying in the first quarter was 129 tons, according to the World Gold Council’s Gold Demand Trends report, led by Mexico which bought 93 tons.

“There has been a fundamental shift in the behavior of central banks,” says Natalie Dempster, head of government affairs for the World Gold Council. “Central banks on the whole have been net sellers of gold for the past two decades.”

Since the second quarter of 2009, however, central banks from emerging market countries have transitioned into net buyers. One of the biggest buyers is China. Over the past five years, the country increased its gold holdings to 1,054 tons from 600 tons. China currently holds only 1.6% of its reserves in gold. Dempster says that if the continent were to reallocate its holdings to 3%, it would need to buy 1,000 tons of gold.

China is the world’s largest gold producer and vies with India for title of largest gold consumer. Nigel Moffett, head of treasury at Gold Corp. says, “[China is] the world’s number one producer, producing 340 tons of gold a year. You don’t see any of that coming out of China. You see a lot of gold going into China.” Moffatt believes that its central bank is a prominent buyer.

“Part of these purchases reflect rebalancing, as gold’s share in total reserves has fallen due to the rapid accumulation of foreign exchange reserves,” says Dempster. “But gold’s attractiveness vis-a-vis other reserve assets has also increased, as the outlook for both dollar and euro debt has been undermined by their respective debt crises, as well as clear signs of a renewed economic slowdown.”

“This is likely to continue for the foreseeable future,” says Mark O’Byrne, executive director of Goldcore, a bullion dealer, “and means that investors would be advised to allocate to gold sooner rather than later as a meaningful price correction is unlikely.”

O’Byrne says that an increase in risk appetite once a debt deal is done in the U.S. might weigh on prices but that this would be a short term dip. “Smart money and official demand for gold remains robust as a very fragile global economic recovery, stubbornly high inflation in many countries and sovereign debt and contagion risks lead to diversification into gold.” Korea just announced that inflation rose to 4.7% in July.