Gold hit record highs above $1,500 an ounce on Wednesday as fears over the U.S. economic outlook boosted its appeal as a haven from risk, while Asian buyers sought protection from rising inflation.
The threat of a downgrade to the United States' triple-A credit rating this week and fresh worries over euro zone debt fueled fears over the outlook for both the dollar and the euro.
With the U.S. currency in particular seen as a key driver of gold prices, uncertainty over how the United States will adjust monetary policy after its second round of quantitative easing comes to an end in June is set to keep the metal underpinned.
There is still going to be a lot of uncertainty over the strength of growth, in the United States in particular, said London-based Macquarie analyst Hayden Atkins.
It looks like that is going to be quite weak in the first quarter, so that may rattle a few people. Then we have a critical policy point coming up with the expected end of (the second round of) quantitative easing.
There is enough uncertainty floating around heading into the middle of the year for people to stick with gold, he added.
Standard & Poor's said on Monday it might cut its long-term rating on the United States within two years, unless Washington can rein in its budget deficit.
If it were to do so, the dollar may come under pressure, impacting currency market and economic stability throughout the world - a perfect recipe for higher gold prices.
Gold has been acting as a currency in its own right, and that is why we are up at $1,500, said Simon Weeks, head of precious metals at the Bank of Nova Scotia. There is an awful lot of bad news in the price. The S&P comment the other day has given us the final kicker to get up here.
Gold has long been seen as the ultimate haven from risk. During the financial crisis that rattled markets in 2009 and 2010 it was heavily bought on that basis, but its rally has since taken on a momentum of its own.
ASIA HUNGRY FOR GOLD
While gold investors in Western markets have been motivated chiefly by risk aversion in recent years, the precious metal is a much more deeply established asset in Asia. India and China are by far the world's biggest bullion consumers.
While buying of largely Western-based bullion-backed exchange-traded funds has tailed off this year, the slack in demand has been picked up by investors in bullion bars and coins, particularly in the Indian and Chinese markets.
Buying in those countries is being fueled by rising consumer incomes and higher inflation, against which gold is traditionally seen as a hedge. Both China and India reported higher than expected inflation last week.
While gold prices are well below their inflation adjusted highs of more than $2,200 struck in 1980 at a time when bullion prices spiked in response to the Soviet invasion of Afghanistan, gold has held its own in recent years against rising prices.
Although in the developed world signs of inflation are preliminary, expectations of rising prices are increasing, said Ben Westmore, an analyst at National Australia Bank.
Buying physical commodities, which traditionally are a good store of value, would be wise if you are in the camp that believes expanded monetary policy is likely to fuel inflation.
Oil prices meanwhile have risen well above $100 a barrel and remain near multi-year highs, while unrest in the Middle East and North Africa and worries about how Japan will recover from last month's devastating earthquake are also supporting gold.
Everything's feeding into this -- sovereign debt, the weaker dollar, inflation and investment demand, said Jonathan Barratt, managing director at Commodity Broking Services in Sydney. He said there was a high probability that gold could rise by another $20 before catching its breath.
(Additional rpeorting by Lewa Pardomuan and Rujun Shen and Chikako Mogi in TOKYO; editing by James Jukwey)