Central banks are helping to drive gold's record run as it closes in on $1,600 (U.S.) an ounce, stepping up purchases amid rising tensions over ballooning U.S. government debt and Europe's financial crisis.
Gold hit a high for the second successive day on Thursday, reaching $1,594.90 in New York before settling back slightly. The metal posted its ninth straight day of gains, the longest in five years, just one day shy of its best streak in over four decades.
Investors are turning to gold as a haven from growing financial turmoil and economic uncertainty as the world's advanced economies continue to struggle in the wake of the recession.
U.S. lawmakers are engaged in a high-stakes standoff before a looming deadline to increase the country's $14.3-trillion debt ceiling and avert a default that would trigger chaos in markets. In Europe, officials are scrambling to figure out a way to prevent Greece's runaway debt problems from swamping the continent's financial system.
Gold is also attractive to investors as an alternative to volatile currencies and a hedge against inflation, which some see as a serious risk if the U.S. resorts to printing ever more currency in its quest to provide economic stimulus.
Central banks around the world are increasingly turning to gold as they seek to bolster their holdings. Their purchases of bullion for the first half of this year have already surpassed the level for all of 2010, according to a World Gold Council report released Thursday.
The increase reflects a change in attitude among central banks. Until a few years ago, central banks were big sellers of gold for about two decades.
"Central banks have been looking for diversification in their portfolios and gold has some value as an asset," said Adam Slater, a senior economist at Oxford Economics.
"For them, gold is even more attractive as an asset than for the average investor."
Mexico was the biggest sovereign buyer of gold in the second quarter.
The Bank of International Settlements, also known as the bank for central banks, says there has been more gold swapping. That suggests commercial banks in Europe are looking to gold for liquidity through its debt crisis, the council noted in its report.
Gold has been on a steady climb so far this year while other commodity prices have fallen behind due to concerns over slowing global growth.
In fact, gold outperformed major bond, equity and commodity indexes in the second quarter. Only U.S. and global treasury bonds performed better in the April-June period, the report said.
"Gold's attributes make it a valuable strategic asset that investors can use to manage risk during periods of economic uncertainty," said Juan Carlos Artigas, the council's investment research manager.
The report shows that during a commodities slump between April 29 and May 6 - which saw some of the largest price drops since the recession in 2008 - gold was still the best performer, falling 4.4 per cent, compared to a 6.2 per cent drop in copper, 12.9 per cent fall for oil and 25.6 per cent for silver.
Gold was up 4.8 per cent between March 31 and June 30, while copper was down 1.1 per cent and silver fell 7.9 per cent during the same period, the report shows.
Analysts expect gold to surpass $1,600 within days, and could run much higher if financial issues in the U.S. intensify. President Barack Obama and congressional leaders are working to come up with an agreement on whether to raise the debt ceiling before the U.S. government exceeds its borrowing limits on Aug. 2.
"They are taking it to the brink," said Bart Melek, head of commodity strategy at TD Securities. "The closer we get to the ground time zero, the more risk," which will continue to drive up the gold price.
Some also expect the U.S. to introduce a third round of stimulus spending, although Federal Reserve Board chairman Ben Bernanke said Thursday that such a move is not planned "at this point," which helped temper the gold price and sent markets lower.
Gold will only settle down once the U.S. harnesses its bloated debt levels, some analysts say.
"Once U.S. debt levels are under control, we believe faith in paper currencies will return and real interest rates will rise into positive territory," Scotia Capital analyst Tanya Jakusconek said in a recent note.
"At that point, we believe the gold price will decline" to about $1,100 for 2017 and beyond.