* Gold rallies to record high; debt, inflation fears support
* Investment case for bullion still strong basis excess liquidity
* Strong appetite in inflation-threatened Asian economies
By Nick Trevethan
SINGAPORE, April 20 (Reuters) - Gold extended its record-breaking run on Wednesday to touch an all-time high above $1,500, driven by a long list of supportive factors including worries about European and U.S. government debt levels, inflation and turmoil in the Middle East.
Gold traditionally benefits from a weaker dollar, times of political and economic uncertainty, and during periods of rising inflation.
“Events in the past few weeks have certainly ticked most of the boxes for strong gold prices. The outlook going forward depends on how long you think sovereign debt and inflation will remain a concern,” said Ben Westmore, commodities economist an National Australia Bank.
“The S&P threat to rerate U.S. debt is an indication that sovereign debt worries are not confined to the Europeans and the discussion around debt in the future will result in safe haven buying, and that is unlikely to abate any time soon.”
Standard & Poor’s said on Monday that it might cut its long-term rating on the United States within two years, unless Washington can rein in its budget deficit. [ID:nN18195555]
That came on the heels of China’s eleventh move to tighten monetary policy in its fight against inflation, oil prices around their highest in 32 months and a devastating earthquake and subsequent nuclear disaster in Japan, which exposed weaknesses in the nation’s electricity infrastructure.
“Investors are focusing on gold’s nature as a safe asset and its universality, that it can be cashed anywhere at any time,” Tetsu Emori, fund manager at Astmax Co in Tokyo, said.
“Given that few countries in the world appear to be in a sound fiscal state nowadays, the focus is all the more put on safety, as reflected in the strength in gold not only in dollar but non-dollar currencies.”
Adding to the heady mix for gold are turmoil in the Middle East and North Africa, where Libya has dissolved into civil war, revolution in Egypt and Tunisia and protests in a host of Gulf States.
Furthermore, the dollar index , a measure of the greenback against a basket of currencies, is trading near 16-month lows hit last week, boosting the appeal of gold in non-dollar denominated currencies.
“In a word, sensational. 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.
“It is unusual to do it in Asian time. It goes to show how much appetite there is in Asia for bullion,” he said noting the high probability that gold could rise by another $20 before catching its breath.
Spot gold prices have rallied steadily from around $430 an ounce in mid-2005 to a record high of $1,502.91 on Wednesday.
For most of the 1980s, all the 1990s and the first half of the last decade gold traded between $250 and $500, and averaged just $360 in the period.
But since then, an explosion in exchange traded funds — instruments that trade like shares, but are backed by physical metal — and growth in commodities as an asset class has seen investor interest soar.
Most notable was the SPDR Gold Trust , which was established in 2004, and at 1,231 tonnes ranks behind the United States, Germany, the International Monetary Fund, Italy and France as the world’s sixth largest holder of gold.
The SPDR had fallen a little out of favour with investors, posting its biggest quarterly drop in its history in the three months ending March 31, dropping 5.4 percent. [ID:nL3E7ET161]
But holdings have snapped back by a little over 25 tonnes this month — with the inflow worth an estimated $1.2 billion.
Physical bullion sellers are also finding a ready market — Asian retail investors are paying a premium of $150 to $250 an ounce for physical material.
One of the main reasons investors have bought gold in the past was a way to protect themselves against rising prices of other goods. Inflation in a number of Asian economies, including China, India, South Korea, Indonesia and Singapore, is running well ahead of levels in Europe, Japan and the United States.
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,” NAB’s Westmore said.
“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.” (Additional rpeorting by Lewa Pardomuan and Rujun Shen and Chikako Mogi in TOKYO; Editing by Michael Urquhart)