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File photo of bars of 250 gram fine gold being stored at a plant of gold refiner and bar manufacturer Argor-Heraeus SA in the southern Swiss town of Mendrisio, November 13, 2008.ARND WIEGMANN/REUTERS

Gold is the ultimate safe haven. Isn't it?

Certainly, bullion has set a series of nominal record highs in recent days, taking its monthly gain to nearly 10 per cent on the back of worries about the U.S. debt crisis.

Investors are particularly concerned because the U.S. sovereign debt market has traditionally provided a "risk-free" basis against which many other investment assets are gauged. Thus, they have turned to the other asset they consider risk-free: bullion.

Yet, the U.S. debt ceiling stalemate and the worsening Euro zone debt crisis have failed to trigger the relentless demand for gold seen during the global financial turmoil of two to three years ago. On Friday, it hit a fresh all-time high of $1,632.16 (U.S.) per troy ounce. But the momentum is flagging.

"The panic buying of previous sovereign debt crises is missing," says Tom Kendall, precious metal analyst at Credit Suisse in London, echoing a sentiment widely shared within the gold industry. "Demand has been steady, but is not nearly as big as in the spring of 2010 or in early 2009, when debt concerns triggered panic buying."

The precious metals market experienced a surge in demand during the worst of the global financial crisis, between January and April 2009 when stock markets hit their crisis lows, and again between April and July 2010 when Greece had to be rescued.

Inflows into gold-backed exchange traded funds, a popular investment among pension funds and hedge funds such as Paulson & Co, jumped by 447 tonnes and 261 tonnes respectively during those two periods, according to estimates by Deutsche Bank. This time, however, demand has been relatively subdued. From April 2011 until this week, inflows have amounted to just 94 tonnes.

One explanation, says Matthew Turner, precious metals strategist at Mitsubishi in London, is that investment has been going "to different products than gold-backed ETFs, such as through futures markets". The Comex gold futures market in New York has seen a huge increase in activity. Hedge funds and other large investors boosted their bullish bets - or long positions - in gold futures to 238,319 lots as last week, the highest level in two years, according to the U.S. Commodity Futures Trading Commission. The scale of the bets is only a fraction below the record 238,943 lots of October 2009.

Other forms of gold investment, though, are showing signs of weakness.

Sales of bullion coins have been more subdued than during previous episodes of heightened nervousness. Although gold coin buying accounts for a relatively small slice of overall investment demand, traders see it as an important leading indicator of sentiment. The U.S. Mint, which sells the popular one-ounce American Eagle gold coin, says investors snapped up 554,000 coins between April and July 2010 and 489,500 between January and April 2009. Since April, however, sales have been lower, at 336,500 coins.

Analysts and traders cite four main reasons for the apparent weakness in demand.

One is the higher price of gold. At $1,632 per ounce, gold is about $400 more expensive than when the Euro zone first rescued Greece in 2010 and $700 higher than in early 2009. Even as some analysts say that prices could rise further, many investors are concerned that gold is no longer the "one-way street" that it was before.

While in 2009 and 2010, investors thought that the upside was greater than the downside, this time they are far from sure. Mr. Kendall says investors confident that U.S. politicians will agree to raise the U.S. debt ceiling are betting on a fall in the gold price. "The disaster scenario is fairly priced, so some investors are trading the market from the opposite side: selling in the expectation of an eleventh-hour deal."

Equally, however, the downside risk appears limited. The bearish positions taken by many investors in the options markets suggest they believe prices could drop to about $1,550-$1,580 per ounce, no more than 5 per cent under current levels. And there are plenty that are backing the opposite trade, in the belief that a U.S. sovereign default could push gold prices much higher.

Moreover, in real terms, adjusted for the cumulative impact of inflation, gold prices remain a long way below the high of $2,300 set in 1980. Citigroup says there is a 25 per cent probability of a "short-term, but not lasting" spike above $2,500 an ounce.

The balance between physical supply and demand of the metal will be important. The summer usually marks a quiet period for consumption by the two largest buyers: India and China. While India has surprised dealers with an unseasonable spurt of demand, there is anecdotal evidence that Chinese buying has slowed. Meanwhile, supply is growing as gold is recycled through the scrap market.

Rally fatigue, though, could be the deciding factor in where prices head. James Steel, precious metal strategist at HSBC in New York, says the market is becoming used to the sovereign debt woes in Europe and the U.S. "I don't want to discount the severity and magnitude of the U.S. debt ceiling problem, but the gold market has been dealing with sovereign debt crisis for more than a year."

No deal, a U.S. default, and all bets will be off. But, bar that outcome, the prognosis looks to be priced in.

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