Gold vaults above $1,600 per ounce on dollar, debt worries

Gold vaulted past $1,600 an ounce Monday, driven by worries about the federal debt limit and ongoing problems in Europe.

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  AP
  Gold prices have risen 12% so far this year.

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AP

Gold prices have risen 12% so far this year.

The price of gold for August delivery closed at a record high of $1,602.40 an ounce Monday, up $12.30 from Friday's close. Silver closed at $40.33 an ounce, up $1.27.

Gold fares well when people lose confidence in paper money, and faith in the euro and the U.S. dollar has taken a pounding lately.

Doubts continue about a resolution of the European debt crisis, despite assurances by Greek Finance Minister Evangelos Venizelos that a European debt deal is attainable at the European Union summit Thursday.

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  "Europe demands more decisive leadership, the market is pushing and pushing for that leadership, and it's going to be hard to supply that," says Caesar Bryan, manager of Gamco Gold fund.

Europe's troubles aren't limited to Greece. Bond traders also worry about bank and government finances of Italy, Spain and Portugal — and the willingness of healthy countries, such as Germany, to bail them out. "The backbone is starting to break under the strain," says Robert Cohen, manager of Dynamic Gold and Precious Metals.

The deadlock over raising the U.S. debt ceiling is pushing up gold prices as well. Congress has until Aug. 2 to raise the debt ceiling or face the risk of default. Even if Congress does agree to raise the debt ceiling, gold could profit if the markets view the deal as inflationary.

"As we walk closer to the drop-dead date, fear will probably intensify," says Dan Denbow, portfolio manager of USAA Precious Metals and Minerals fund.

Europe's woes outweighed the U.S. debt deadlock to traders. Yields on six-month Treasury bills dropped to record lows at Monday's auction, and the dollar gained against the euro in currency trading.

"When gold and the dollar move together, that's a quality trade," Denbow says.

At Blanchard & Co., a New Orleans precious metals dealer, business was brisk. "Looking at the numbers coming in, I'd suspect that this will be the best July ever" for gold sales, says David Beahm, vice president of economic research.

One-ounce gold U.S. Eagles are the hottest seller, Beahm says, but smaller coins in 1/10th of an ounce are popular, too, partly because they're more affordable. "People want any kind of gold they can get their hands on," Beahm says.