Spot gold surged more than $100 in 11 straight days to Tuesday, its longest winning streak in four decades, hitting a record $1,609.51 an ounce, as debt default fears in the United States and Europe drove investors to seek safety.
Gold stayed above $1,600 on Thursday as market watchers remained cautious about the debt situation on both sides of the Atlantic.
Asian giants India and China, the world's two biggest consumers of the precious metal, expect to see demand continue to climb for the rest of the year, as growing wealth and stubbornly high inflation make bullion an attractive asset.
"Record high prices won't scare away investors," said Shi Heqing, an analyst at Antaike, a state-backed metals consultancy based in Beijing.
"Investors are likely to chase the rally and continue to buy gold because paper money feels increasingly worthless and they are worried about inflation."
Shi expects China's gold demand to rise about 20 percent to near 700 tonnes this year from 570 tonnes in 2010 as Beijing struggles to tame annual inflation that hit a three-year high of 6.4 percent in June.
In India, the wedding season in mid-August is expected to drive up sales of gold, a fixture in dowry and gifts.
"The case for gold in the longer term is still very strong. Gold may appeal to new classes of investors who previously avoided the market in favour of more mainstream investments like bank deposits, bonds and equities," said a Singapore-based trader.
"Potentially there's a whole new market for small-sized physical gold bars if these investors lose faith in paper."
Technical charts point to gold hitting as much as $1,940 by the end of the year, given the strong bullish momentum in the past two weeks, Reuters market analyst Wang Tao says.
'$2-TRILLION, $3-TRILLION ELEPHANT'
Even central banks, until recently keen to disperse some of their gold holdings, could soon be sniffing around for more of the precious metal, analysts say.
In 2010 central banks became net buyers of gold for the first time in 21 years, as developed nations of Western Europe and North America reduced selling in the wake of the global financial crisis while emerging economies tried to diversify their holdings of foreign currencies, especially the dollar.
Deepening worries about debt crisis contagion in the euro zone, uncertainties around U.S. growth in the second half and its impact on the greenback, are likely to increase central banks' appetite for gold.
"If you look at projections on debt for the United States and for some European countries enjoying triple A status, it's looking very likely that these countries are moving from triple A to something less shiny," said Philip Klapwijk, executive chairman at GFMS, a metals research consultancy.
"And that's surely going to burnish gold's credentials for asset managers globally, particularly central banks and some of the sovereign wealth funds."
But central banks have to tread lightly, as sizable purchases could jolt the relatively small gold market.
On April 24, 2009 spot gold prices jumped more than 1 percent, when China announced an increase of 454 tonnes in its gold holdings, representing a jump of 76 percent from 2003, the only previous occasion it revealed the size of its gold reserves.
Last year, global gold supply, including mine production and scrap, stood at 4,108.2 tonnes, which translates into about $210 billion at current price. Above-ground gold stocks stood at an estimated 165,000 tonnes, valued at more than $8 trillion.
By comparison, the amount of U.S. debt held by the public stood at $9.75 trillion by July 19, doubling from five years earlier -- adding nearly $1 trillion a year, based on data from the U.S. Treasury Department.
"Central banks have the will to increase gold holdings, but it is not a practical option and rather difficult," said Dong Tao, chief regional economist at Credit Suisse.
"Gold supply simply doesn't grow as fast as China's foreign reserves. Only the increase in U.S. debt can match that."
Central banks could raise gold holdings marginally, he said, but sizeable purchases could cause an earthquake in the market.
"We can buy whatever with our money without causing price distortion, but a $2-trillion, $3-trillion elephant will certainly cause distortion."
China has the world's biggest foreign reserves, which stood at $3.2 trillion at the end of June. Gold holdings of 1,054.1 tonnes make up just 1.6 percent of its reserves, though China ranks sixth among the world's top official holders of gold.
INDIA, CHINA DEMAND
India and China together made up 57 percent of first-quarter global consumer demand for gold, the World Gold Council says.
China's frenzy for gold prompted the central bank to step up sales this year of gold and silver Panda Coins.
The People's Bank of China plans to sell 500,000 1-ounce gold coins, or 66 percent more than its earlier target of 300,000. It also tripled sales targets for half-ounce, quarter-ounce, 1/10-ounce and 1/20-ounce gold coins to 600,000 each from 200,000 earlier.
The increase in sales of these coins alone will represent a rise of 560,000 ounces in gold demand, or 17 tonnes.
Commercial banks and fund houses are also cashing in with products to let investors buy more gold jewellery, coins and bars.
Two Chinese companies, Lion Fund Management Co and E Fund, have launched funds to invest in gold-backed exchange-traded funds overseas, the only two Beijing has allowed so far to do so. E Fund is also investing in gold mining stocks abroad.
India, also the No. 1 gold importer, bought 286 tonnes of gold overseas in the first quarter, up nearly 10 percent from a year ago, World Gold Council data show. The country imported 959 tonnes of gold in 2010, or an annual increase of 72 percent.
Rajesh Mehta, chairman and managing director of gold importer and retailer Rajesh Exports, said he expected his firm to import 130 tonnes of gold in the year to next March, up 8 percent from the previous year.
"Indian gold jewellery demand is expected to show resilience in the face of higher price levels, with some opportunistic buying on price dips," said Ajay Mitra, managing director for India and Middle East at the World Gold Council.
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